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.

Good day to all of you from California. I started this company 19 years ago because I was convinced that electricity is a basic human need that should be generated cleanly and delivered reliably and resiliently. And there were no solutions that could provide that combination to anyone let alone make it affordable and accessible to everyone. The extended Bloom family worked tirelessly for 17 years as a private company to make that dream a reality. And we have shown grit and resiliency to weather through the many hurdles we had to overcome. Today, 19 years later, the time has come when the consumers understand the need for reliable and resilient power and its impact on their overall safety. They are now willing to value it. Today, we have a product that is battle proven in the field and ready to scale to the next level with that no compromise solution that is unique, and unmatched in the marketplace. Let me start with the recent events in our home state of California and how they relate to our business. It's mind-boggling how much the energy landscape has changed since our last earnings call. We have witnessed how vulnerable our state electricity infrastructure is and how unprepared we are as a society to cope with the consequences of climate change. This as we mark the tragic one-year anniversary of the Camp Fire in Paradise, California that took 85 lives. We express our deepest sympathies to our fellow citizens of California who have suffered significant health, safety, and economic hardships due to the fires, evacuations, and repeat prolonged power outages. The public safety power shutoff has not been a satisfactory solution. Despite the massive shutoffs, fires still started due to electric wires and spread quickly. Without power, many people were unable to access essential emergency services and basic communication, which further jeopardized their safety. consumers are increasingly demanding certainty and reliability of power availability. So what does this mean to Bloom Energy? The Bloom Energy microgrid is the right product right now to add to the infrastructure. We have an always-on microgrid that is unmatched in the marketplace. Bloom microgrids provide customers with reliable, always-on clean electricity, no matter how long the utility grid power outage. A microgrid is a local grid that is specifically installed to allow critical facilities, businesses, and communities to operate without interruption when a surrounding electric grid becomes unreliable or unavailable. Bloom has 89 always-on microgrids in operation. And 26 of those microgrids are in the service areas that were subject to the recent California Utilities Public Safety Bar shutoff warnings. All of them, let me repeat, all of them performed reliably for our customers. The customers include manufacturing facilities, corporate campuses, and data centers. These microgrids are field proven, readily available, and the only viable clean alternative to the failing grid for critical facilities, businesses, and consumers that demand reliability and power certainty for extended periods of time. Two recent examples illustrate how valuable the Bloom microgrid can be to a business during an extended power outage. The first one, a Bloom multi-megawatt microgrid that supports a critical load for an industrial facility in California. In early October, during the first emergency utility shutoff of the month, Bloom's microgrid ensured the facility could operate. In the recent shutoff towards the end of the month, the same customer voluntarily disconnected from the unstable grid and relied on its Bloom microgrid for power. Due to the proximity of the wildfires, management evacuated the facility for the safety of its employees. As they evacuated, they shut off all power sources, including backups. They kept the Bloom microgrid in operation to support their critical load. Our customer had complete confidence in the Bloom microgrid to operate autonomously. They knew that with real-time remote monitoring and control, Bloom could shut down with remote instructions the microgrid safely if a need arose. Let's shift to the East Coast for a second example. During the heat waves in August, a large retailer in the Northeast had grid-related power interruptions ranging from one to five days in their local areas that impacted five of their stores. The blue microgrids in those stores allowed them to stay open and serve their communities during a time of real need. Unlike the multi megawatt first example, these stores are each about 200 kilowatts of base load power. These examples illustrate what communities and businesses can expect from Bloom's 21st century power solutions. The natural disaster related resiliency issues are not restricted to just the two posts. It's a global issue and Bloom is well positioned to address this challenge with our always on microgrid solution. This is a big opportunity. As I see it, there is a fundamental shift in thinking from what is the cost of power to what is the cost of not having power. We expect the recent power disruptions to be a strong and sustained tailwind for our microgrid solutions and products. The reason? Interruptions from natural disasters on the aging and congested grid are not a new normal, but the beginning of a trend that will worsen. The grid-based hardening will not occur in a timely manner. A timely solution is only possible by valuing resiliency and investing in proven solutions like microgrids. The microgrids allow consumers to take their power destiny into their own hands. Our customers in the Northeast experienced 150% increase in grid disruption in August of 2019 compared to the same month in 2018. In California, just from September to October of this year, the disruptions to the grid in the areas around our microgrid customers have more than doubled. Then Mother Nature speaks, we have no choice but to listen. State officials and regulators are responding to these resiliency crises with a new sense of urgency and are sending the right market signals. California Governor Newsom said last week, I quote, we have got to harden our equipment. We have got to modernize our equipment. Microgrids, new strategies of distributed networks, We recognize the need to do something in this space many months ago, and I've now required $5 billion of investments as part of the plan." It is important to note that for the first time, there is a willingness to value resiliency and invest in it. Last quarter, we discussed potential headwinds in New York related to the battle over a new natural gas pipeline. it is clear that political leaders and regulators have shifted their thinking as they realized that the only other viable near-term option, oil, is dirtier, less reliable, and more expensive. Since our last earnings call in August, all of the Democratic senators who represent Long Island have come out in support of the pipeline. And then, just last week, Governor Cuomo said, quote, you have to coordinate the sequencing of moving off gas when you have the renewables to satisfy the demand. Otherwise, you go to oil, end quote. In other words, you cannot disconnect from the gas without compromising safety and the environment. The large-scale weather-related events are forcing all of us, including policymakers, to deal with both the causes and consequences of climate change. We need both decarbonization and resilience with optimum balance so we can protect both the planet and the safety of our people. In California and New York, Costs related to the transmission and distribution of electricity has risen dramatically over the last 10 years, approximately 20 to 50% depending on the utility. Customers have had options to hedge the generation portion of their utility bill to competitive markets, but they have no such option for the transmission and distribution portions of their bill. PG&E, has requested through 2021, potentially a 2.9 cents per kilowatt hour increase for commercial and industrial customers. The corresponding number for Southern California Edison is 2.8 cents per kilowatt hour. In both these cases, transmission and distribution costs account for over 50% of the potential rate increase. In contrast, The Bloom Energy Server, by producing electricity on site, avoids distribution and transmission costs and allows customers to lock in a fixed and predictable electricity cost. In sum, these climate change related market forces are driving interest for always on reliable, clean power that's affordable and predictable. Developing a product to meet those requirements has been Bloom's mission for the past 19 years. The time is right, and the time is now to rapidly expand our product deployment. Looking forward, as an innovative, progressive technology company, we understand the importance of reducing global carbon emissions. The Bloom platform is uniquely capable of moving from a low-carbon to a carbon-free solution. We are moving aggressively to harness biogas as a fuel to deliver zero-carbon electricity. We recently announced a collaboration with CalBio to produce renewable electricity from dairy waste to power electric vehicles. This collaboration creates local jobs, generates additional income for dairy farmers, and enjoys strong local community support. There's an estimated 320 megawatts of economically viable daily biogas in California alone. I'm extremely thrilled about our joint effort with Energy Power to deploy commercial scale on-site biogas to electricity projects in India. We plan to install and operate four megawatts of Bloom Energy servers in the state of Maharashtra, India next year. Agricultural and municipal waste will be used as feedstock for producing the biogas. Just this week, India's capital, New Delhi, recorded its worst air quality in three years, leading to the city declaring a public health emergency, schools shut down, and banning millions of vehicles from the roads. Crop residue is a big contributor to the bad air quality. In the future, it can be used as a feedstock to provide clean, renewable electricity using bloom servers rather than simply burning it. We're also working to bring our energy platform to the marine shipping industry to reduce the significant greenhouse gas emissions produced by that industry through a partnership with Samsung Heavy Industries. This is a very large and new market opportunity. To put it in perspective, a single large cargo ship would require up to 100 megawatts of power, and if the marine shipping industry were a country, it would be the sixth largest emitter of greenhouse gas emissions in the world. In the past months, we are experiencing a strong customer interest from the Korean market for our energy solution through our partnership with SK of Korea. A number of questions have been asked and some have expressed doubts regarding the useful life of our fuel cell modules. We have released a technical database report today which shares our research findings and addresses those questions clearly with actual field data. We encourage you to read this report in its totality. It is found on our website. In conclusion, I'm pleased to announce two important additions to the Bloom Energy Board effective November 12th, Jeff Emelt and Michael Boskin. Professor Boskin is an eminent economist at Stanford, served as chairman of the Council of Economic Advisors for President George H. W. Bush, and remains involved in major economic policy issues, both in the U.S. and globally. He has served on several corporate boards, including ExxonMobil and Vodafone, and continues to serve on the board of Oracle Corporation. Jeff Immelt served as chairman and CEO of GE for 16 years. He has deep insights into the global power markets and strong connections to customers. He has experienced multiple market cycles and has had exposure to Bloom since its founding. He knows our company well and believes in our mission. I'm thrilled and privileged to welcome both Jeff and Michael to the Bloom Board. I will now hand this over to Randy for his remarks on Q4 2019. Randy?

Changing the conversation to our outlook, in Q4, we expect acceptances to be between 355 and 385, ASPs to be between $5,920 and $6,220 per kilowatt, and our total installed system costs to be between $4,250 and $4,550 per kilowatt. Also, we expect operating expenses to be between 46 and $49.5 million. To close today's prepared remarks, I wanted to announce that I will be retiring and transitioning over to my replacement over the next few months. I turned 65 last July, and after a 43-year-plus professional career with over 33 of those working here in the Silicon Valley, all in technology, I feel it is time. In my almost five years at Bloom Energy, I'm proud to have been part of a team that has advanced the ball significantly when it comes to the fuel cell industry. From Q1 2015, which is roughly when I joined the Q3 of this year, our product cost on a per kilowatt basis has declined by over 62%. Our quarterly gap revenues have grown by almost 270%, and we've moved from losses to profitability at the non-GAAP operating income level. Very nice progress over this period. However, I believe this is just the early innings for Bloom. I firmly believe that the company has great opportunities ahead. I say this because right next year, the next generation of the Bloom Energy Server, which will initially have 50% more power output, should begin commercial shipments, providing a platform for further cost reductions well into the future. The macro factors, such as the lengthy public safety power shutoff events currently being experienced in California, are heightening awareness and providing greater clarity for future demand. And finally, the strong case that boom could be the lowest cost solution for 24-7 low to zero carbon-based power. I only wish I was five years younger. So thank you KR for the opportunity. I'd like to thank all of my fellow Bloom colleagues for their support over my tenure. Once again, I'd like to thank all of you on the call today and I will now turn back to KR before we take questions.

It is amazing how quickly five years have gone by. I vividly remember recruiting Randy out of a nascent retirement and convincing him to join Bloom and help take the company public. Our goal then was to take Bloom public in 2016, and Randy promised me a maximum of three years of service when he joined. Randy has done an amazing job of helping build this company over the last five years, including taking it public last year. He will stay with us and help with the external search process that we have started and through the transition. Many of you will see him in person at the investment conferences he will be speaking at this month and next. I want to thank him for his service and wish him a wonderful and well-deserved retirement. Randy, thank you from all of us at Bloom. In conclusion, let me summarize where I see the company going in the next three years. We have thus far created four generations of product, each one significantly better performing and lower cost than the previous generation. We are now cranking that flywheel for a fifth time with our Bloom 7.5 platform, whose development is on track. When we successfully execute this product, we can deliver under 10 cents per kilowatt hour electricity that is reliable, resilient, clean, and that has low to zero carbon footprint. This combination is unique. No other product in the market can do what our Bloom servers do. And for this reason, I'm extremely excited about our future. We will now move to Q&A.

Ladies and gentlemen, at this time, in order to ask your question, please press star followed by the number one on your telephone keypad. To withdraw your questions, press the pound key. We will now pause while we compile the Q&A roster. And your first question comes from the line of Michael Weinstein from Credit Suisse.

Hi, guys. Randy, congratulations. And you're going to be missed. You're going to be missed.

Thank you, Michael. Thank you for the kind words.

Yeah. Hey, could we provide an update perhaps on the 138 megawatt backlog as of the fourth quarter of 18 that existed, especially as we near the year end now and, you know, heading into – you've got fourth quarter guides out there now, so maybe we can talk about that.

Repeat that one more time, Michael.

Are you asking about our backlog or are you asking about – Yeah, maybe an update on the backlog and also – Can you talk about – I'll just throw all my questions out right now. Talk about California, the shorter PPA product that you had mentioned launching, where does that stand, and what's been the response so far in California to changes to your approach to sales there?

I'll take the first one, the backlog. We're going to stick with the policy of – of just announcing backlog once a year. We'll do it on the call. We'll do it ahead of when we file the K. Again, I want to stress orders come in very, very lumpy. We'll often see an example will be a big box store order all at once, and that'll go over four or five quarters of shipments and acceptances. So to keep from giving any false pretenses one way or the other, we're just going to stick with one annual disclosure of our backlog. We'll do that. We'll do that on the next call. With respect to our, as you referred to it, shorter PPA, I'll let KR take that.

So, hi, this is KR. So I think you're asking the question on the shorter PPA, the market dynamics given what's happening with the PSPS. Is that the right way to interpret your question? Exactly. Yeah. Okay, great. So look, when an event like what has just happened, that's completely unprecedented. 2.5 million lost power, almost 6 million were affected by it one way or another. It changes the entire discussion of what's going on out here, and we are seeing that. Let me answer your question in two parts, okay? One is the long term, and one is what does it mean immediately. If I just take it from the tactical to the long-term first and then bring you back, the fundamental thing that's shifted, that is for the immediate term, the midterm, and the long-term, is around people focusing on not just the cost of power, but the cost of not having power. And the other big tectonic shift we're seeing is, as you know, this is a regulated business for the IOUs, And the rate design has never valued resiliency. What you're hearing from the governor and other policymakers speak is they want to change that and put a value for resiliency. When they do that, it's extremely good for Bloom. This is exactly what we have been saying should be done because the product has to be valued for resiliency, for its reliability. and safety is extremely important. So that's the long-term picture that I want you to think about, as well as customers saying, we want to take our destiny in our own hands. We are seeing that. So how are we seeing that in a very tactical way, if you want to see that, is whether it's our existing customers, whether it's new prospects. We are seeing a significant inbound inquiry increase. roughly about five times what we have normally seen since these events have started happening. And we think that our existing customers who typically have been grid parallel in some cases are now coming and asking for microgrid solutions. The always-on microgrid becomes extremely important. The second thing also that we are seeing in the dynamic there is the interest today is not just coming from the facilities. It is coming from the C-suite. And if you ask why is it coming from the C-suite, it is about saving the business. It is about keeping the lights on for the business, protecting the safety of the people, and serving their customers. So we see all this happening in terms of what is coming in. How will it translate is, as Randy said, these are tens of millions of dollars worth of transactions, and they have to run through a process. When the C-suite is involved, we expect the cycle to shrink compared to when it is just a facilities buy for electricity. This is mission critical for their business now. It's about saving the business. Even with that, it will be the process will shrink. So what we expect is that we will see the impact of all this in our 2020 bookings, and most of that revenue to that normal cycle will be in the 2021 cycle.

Got you. One more question about the length of time that the servers – you know, the lifetimes they last at, you know, your papers note that it goes from 1.9 years back in 2011, now currently at 4.7 years on average. Where do you expect to see for Generation 7.5?

It will be greater. It will be north of that without a question. How much north? I am not going to speculate on that until we get to – until we get to – having enough of the lifetime and enough data to be able to say that. So the 4.7 that we mentioned is for the servers that we shipped in 2015, and that's extremely important. Let me take a little bit of time to be able to walk you through that. If you look at the white paper, the technical note that we just referred to, it is 4.7 years for the units that we shipped in 2015 at the median age. Why are we referring to that? You add 4.7 years to 2015, roughly, most of those units should have seen their life by 2019 right now. Anything past that, they're still in the field. So we are saying you don't have to trust our judgment. You don't have to rely on some third party's judgment. Simply rely on field data. Equipment don't lie. This is equipment working in the field. We have the data. This is 4.7 years. We are saying 2016 and onwards, we expect even greater life incrementally as you go, going to five years. The 7.5, I would expect definitely for it to be greater than five years. But how much greater? Stay tuned. We will tell you as soon as we have confidence in that number. And the other point I want to make here, is even in the 2014-2015 time frames, we had predicted the median life to be what they are. The field has proven that we are correct. That shows credibility to our being able to say why we can support a number. These numbers are supported through extensive knowledge base, extensive field data of actual working items.

Okay, thank you very much.

And your next question comes from the line of Steven Berg from Morgan Stanley.

Good afternoon. Good afternoon, Steven. How are you? Good. Randy, congratulations on your retirement, and thank you very much for all the help you've provided. Thank you, Steve. Thanks for your time. Really appreciate it. I wanted to build on Michael's question just in terms of the sales outlook broadly. You know, I guess since the last call we've had as you eloquently walked through, okay, our, you know, series of shutdowns of power in California, you've had announcements in the California dairy industry, in the shipping industry. I think you mentioned some potential incremental opportunities in Korea. But I guess as I'm thinking about all those opportunities, and you mentioned this a little bit on Michael's question, just in terms of, you know, the time it takes to translate these types of dynamics into actual sales. You know, there's a lot of attention in the investing world on 2020. And just in terms of that cycle of translating agreements or dynamics into actual incremental contracts, would you mind just touching on that in a little more detail?

Yeah. So, Stephen, the way – The way I see it is like following. When you flip a switch and electricity does not come in, that dynamic and that tailwind or that reality trumps every other headwind that was created that did not have that kind of an impact. Because it is about the safety, the reliability of now. And nobody can ignore that. And I can tell you, you know, these are real-life situations. I, in my house, did not have power for almost four days. Okay? Our chief marketing officer, who has a medical device, did not have power in his house. So these are real things that happen, and it touches one in six Californians, you know, from this period. What this means is the sense of urgency with which our existing customers and our prospective customers are engaging with us and the levels at which they are engaging with us, the C-suite, is something we have not seen before. It is new to us. So as I see it, I would expect that the sales cycles become a lot shorter. Can I tell you how much shorter it can become? The answer is no, I don't know, right? It is still multi-million dollar investments, whether it is a power purchase agreement that they make, whether they're committing to that kind of numbers, or whether it is a lease, or whether it's a capital purchase. So it'll go through a process, but we expect this process to be fast. So think of a few months on the bookings, and think about our normal cycle. of nine to 12 months to convert that bookings to an acceptance. That's why I mentioned we will see those bookings happening and the impact of it. We expect it to be significant in 2020, early 2020. And we expect the results of that showing up in our P&L in 2021. Now, let me just say that this is not a California phenomenon alone. I think the nor'easter. I think the winter. And we saw that happen in the summer in the northeast. It is a global phenomenon. It's the heat in India. It is the, you know, tremendous pollution that is making the government think very heavily about biomass conversion to biogas, thereby preventing people from burning the crop. So this is a phenomenon that I think we're going to see worldwide. It is definitely a sustained and strong tailwind in our back. I wish I could tell you how quickly and how fast and numbers that it will convert to. My hope is it's going to be a very good one, but I cannot give you numbers at this point.

Does that make sense? Yeah, I just want to remind everyone that, as K.R. pointed out, from the time of booking, it's nine to 12 months to the time you're going to see the revenue, or as we refer to it as an acceptance. So what KR is saying is we think the sales cycle is definitely contracted and shorter, but it's still in the, you know, three to six-month kind of timeframe, maybe even seven months. That's going to put the bookings, you know, call it the first half of next year, for which you'll probably see early in 2021. So I just want to reemphasize that point. Now, there are exceptions to that. For example, our international business to where, we don't do the installations, that's done by our partners, whether it be India, it be Japan, it be South Korea, that happens, which means that that order or booking to shipment is a lot less than that nine to 12 months. It could theoretically even occur in the same quarter, but usually occurs one quarter and the shipment acceptance is in the next. So, there could be, I know we give guidance on our last call, for year-over-year growth being in the flat range. But the point being is that there could be upside to that depending upon the international orders that come in next year. So I'll leave it at that.

Oh, that's really helpful, Collar. Thank you. And just on the shipping contract or agreement that you've reached, I guess on the positive side, even a small number of shifts from a megawatt point of view can very quickly be a pretty big needle mover for Bloom. I guess I'm thinking, though, about the timeframe required to secure orders in the shipping industry, just given the relatively long lead time to actually construct one of these ships. And would you mind just talking briefly in terms of sort of the lifecycle of that agreement in particular, without being too specific about any one project, but more just about the sort of the time over which you would be able to, you know, sign up agreement there relative to the time required to manufacture, you know, a ship and just sort of where we stand with that.

So, this is the best of our understanding from the shipbuilder, Samsung, and, you know, as well as others that we have spoken to. The demand for wanting ships that are lot smaller in carbon footprint is extremely high from the end users of the ships, the buyers of the ships. And they're seeing this internationally. Why? The reason is the UN International Maritime Organization that controls and puts standards on these things has put an extremely stringent requirement on carbon footprint. on these ships that has to be, that has to happen in a very short time period. And we have, you know, talked about this in our press release on this, you know, on this particular topic for those of you that want to, you know, read up more about it. That's a requirement. And most ship operators believe that this is a number they have to meet because unlike local installations and facilities, the ships have to travel globally, and they have to be in multiple ports, and any country insisting on it is going to set the standard, so to speak. So they're all moving very quickly towards this. So what we understand from Samsung is there is a significant demand as soon as they have a product ready. So what is happening now is they have already passed the first step with the regulators of saying conceptually this design, as they have conceived with Bloom, is something that can go to the next stage of development. We are doing the development. The whole development and certification, I would imagine, is in the two-year timeframe. So to answer your question, Stephen, it is a two years out. as opposed to something that's going to happen next year in terms of actual acceptances and being able to ship. But it's an enormous market, and it's a unique market for us in terms of being able to capitalize with very few other good alternative options that a shipbuilder would have.

Very good. Thank you very much.

Ladies and gentlemen, and your last question for today's call comes from the line of Pavel Malenkov from Raymond James.

Thanks for taking the question. Another one, if I may, on the Samsung agreement. So this is your first kind of entry into the transportation sector. Are you looking at other options or other end markets beyond distributed generation?

The answer is yes. And the answer is yes in the following way. Just think about what happened with distributed computing. We went from mainframe computers to distributed computers, but the mainframe computers are not dead. They're called cloud computing. And these are large mainframe computers except They're not built as one single monolith. They're built with thousands of distributed servers stacked together. If you think about our Korea power tower, it is nothing but a whole bunch of room distributed generation stacked together both horizontally and vertically to build a huge structure that gives you very good density. To give you an idea of what this means, In a one-acre space, we can do 100 megawatts if it is 50 feet tall. That's an amazing power density. And the beauty is around that one acre, you don't need any easement space because there is no noise, vibration, pollution, smokestacks. So we believe that there is going to be a transition where even for places that need significant amount of concentrated power, like micro power plants, mini power plants, midi power plants, you will build them as these 100 megawatt monoliths. And if you want a gigawatt, you will build 10 of them because the beauty is, unlike a monolithic power plant, you don't have to take down an entire power plant to service it. Availability will be high. And our efficiencies will be significantly higher. And we are, as we continue this flywheel that I talked about, about cost reduction, going to get to a point where building a large power plant using these servers this way will be cheaper than building a large-scale power plant. So we will come full cycle, extremely similar to what the compute industry did. So that's where I see us going in the future. In addition to serving the distributed needs, So we will be both on your desktop as well as in the cloud, the same thing. We will be next to your building, and we will be in the central power plants.

Okay. Let me ask one more question about the ITC. In the solar industry, we're watching demand pull in because, of course, the tax credit steps down in 2020 and, again, in 21. Given that we have the same dynamic with fuel cells, I'm curious if that may accelerate some of your bookings, you know, either by the end of this year or next year.

Well, you know, clearly the ITC is an incentive for the end customer, and yet having a sunset will create, a similar dynamic in the marketplace as it's creating elsewhere. So we would expect the same thing, and we as a company are prepared for the safe harbor in construction models that, you know, solar and wind industry is planning. We are planning for something similar on our site, too. So that's a good question.

And we're leveraging that, obviously, with our customer base to point out that there is a savings when they –

Book sooner rather than later.

Exactly.

Thank you. Thank you.

Ladies and gentlemen, this concludes today's call. You may now disconnect.