Bloom Energy Corporation

Good afternoon and welcome to the Bloom Energy Second Quarter 2021 Earnings Conference 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 Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on Bloom Energy's second quarter 2021 earnings conference call. To supplement this conference call, we furnished our Q2 2021 earnings press release with the SEC on Form 8K and have posted it along with supplemental financial information that we will periodically reference throughout this call to our investor relations website. The matters that we will be discussing today include forward-looking statements regarding future events and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity, and full-year outlook for 2021. These statements are subject to risks and uncertainties as discussed in detail in our documents filed with the SEC from time to time including our most recently filed forms 10-K and 10-Q. These documents 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 2021 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our Q2 2021 earnings press release available on our investor relations website. On the call today are K.R. Sridhar, Founder, Chairman, and Chief Executive Officer, and Greg Cameron, Chief Financial Officer. K.R. will begin with an overview of business highlights from the quarter. Greg will review the operating and financial highlights of the quarter, and after the prepared remarks, they will take questions. I will now turn the call over to K.R.

Good day, and thank you very much for joining us on the call. I'll share my thoughts on the state of the energy market and our company progress before turning it over to Greg. From a big picture perspective, the three key attributes that matter when it comes to energy and electricity are resiliency, sustainability, and cost predictability. Here are the trends that we see in the marketplace with respect to these value propositions. First, on resiliency. They're all experiencing and witnessing the increased frequency with which natural disasters are impacting our everyday life. These events around the world cause major disruptions to energy supply and availability. Their adverse impact on businesses' ability to operate lingers for a prolonged period of time after the disaster strikes. In the United States, a 2021 report on commercial and industrial power reliability states that 44% of companies reported that they lost power at least once a month. This is double the number of outages from just two years ago. The situation worldwide is even worse. The World Bank's research shows that on a global basis, companies experienced 2.42 power outages in a typical month in 2019, and that number ballooned to 6.19 power outages per month in 2020. That is a 155% increase in just one year. Contrast this to the 117 microgrids Bloom Energy had operational in 2020. Our microgrid site locations experienced several hundred utility grid power outages during 2020, and blue microgrids protected our customers from business disruption over 99% of the time. Now, to the second value proposition, sustainability. The World Wildlife Federation's Power Forward 4.0 report extract the commitments of companies to sustainability and decarbonization. We are seeing a dramatic shift in the efforts businesses are making to decarbonize their footprint. In 2020, 60% of Fortune 500 companies set a climate or energy-related commitment. Of that nearly 300 companies, 83% are setting net zero carbon emission goals with aggressive timelines. Businesses are leading the way and not waiting for regulation to kick in. As companies look for ways to meet their science-based targets, the Bloom Energy Platform, with its flexible fuel approach of low leakage natural gas, biogas, or hydrogen, can offer a practical solution that works now and a future-proof pathway to satisfy their sustainability commitments for years to come while simultaneously enhancing their resiliency and business continuity needs. Now, let's turn to cost predictability. Here are a few facts about the rate structure for electricity. and regulatory framework mandate that costs associated with building, reconstructing, operating, and upgrading the grid are shouldered by power consumers. In the future, our nation's aging grid will need expensive updates to be resilient to climate-related disasters. More generation assets will need to come online to enable electrification of transportation, and stranded assets like coal and aging nuclear will be decommissioned and replaced by newer and cleaner alternatives. All of these developments will come with big price tags and lead to steep and unpredictable escalations of utility prices for consumers. Contrast that to Bloom. Over the years, we have demonstrated our ability to reduce our costs and offer lower electricity prices to our customers. We are committed to and confident of continuing this trend. Our behind the meter, always on Bloom solution offers cost predictability. Our customers can lock in their electricity tolling rates with us for up to 20 years. So as costs of grid-based electricity increases, our costs are coming down. While the cost of grid-based electricity is unpredictable, we offer firm and predictable tolling rates. I believe these facts underscore Bloom's core value as a solution provider in this transforming energy space. I see this as a perfect opportunity for Bloom Energy, and we are well positioned to seize it and grow. We executed well in the first half of the year and delivered on our promise of resiliency, cost predictability, and sustainability. Now, I want to talk about our year-to-date progress and key investments. We are confident in our solutions and the value they offer our customers. That is why we are putting our capital to work and investing now to enable future growth, fulfill future demand, and further advance our technology leadership. These investments will create long-term value for our shareholders. The two important investment areas I want to focus on are technology leadership and people and infrastructure. Let me start with technology leadership. In our hydrogen product development, just a few weeks ago, we unveiled the Bloom electrolyzer, the most energy-efficient electrolyzer to produce clean hydrogen to date that is up to 45% more efficient than any other product on the market today. This is not a concept, but a reality. It is a functioning electrolyzer and a major leap forward for our company and the hydrogen economy. It relies on the same commercially proven and proprietary solid oxide technology platform used by Bloom Energy servers to provide on-site electricity at high fuel efficiency. It offers unique advantages for deployment across a broad variety of hydrogen applications using multiple energy sources, including intermittent renewable energy and excess or waste heat. Given its efficiency and input options to make hydrogen, Bloom Energy's electrolyzer is expected to produce hydrogen through electrolysis at a lower price than any alternative on the market today. Our efforts in hydrogen also include a partnership with Heliogen to produce clean hydrogen from water using only solar-based heat and electricity. In keeping with our sustainability values, last week we announced that we will convert our entire global natural gas fleet to certified low-leak natural gas to prevent the release of harmful methane emissions stemming from upstream gas production. Bloom Energy, beginning with this initiative, hopes to catalyze a robust certified gas marketplace that is primed for widespread adoption. The goal of this program is to make it easy for consumers to procure low-leak natural gas in the market. Bloom Energy will launch a campaign to urge all large users of natural gas to demand and purchase this environmentally responsible option from their suppliers, thereby sending a market signal to the gas supply chain to avoid methane leaks. We think of this as the equivalent of fair trade coffee and conflict-free minerals, and it is critically important to our commitment to being a sustainable company. Our progress in the marine marketplace also continues. as we announced the achievement of two key milestones on our path to decarbonize a centuries-old maritime industry. Our initial design with Samsung Heavy Industries for an engine-less fuel cell-powered liquefied natural gas carrier has received approval in principle from DNV, a premier international maritime classification society. We were also verified as an alternative power source for vessels as part of the American Bureau of Shipping, new technology qualification service. We are committed to the marine sector and are investing today to be the market leader in this segment. In biogas, we have deployed Bloom Energy servers that use landfill biogas with a major Silicon Valley-based technology company. The system is operational, and we'll share more about our biogas developments in the months ahead. And we announced a first combined heat and power project in collaboration with SK EcoPlant. This is a new 4.2 megawatt installation and marks South Korea's first ever utility-scale solid oxide fuel cell CHP initiative. And construction will begin this year on this project. Now, let me turn briefly to our investments in people and our infrastructure. Since the start of the pandemic, Bloom has increased its total number of jobs by more than 20%. Additional hires in sales and marketing will create more demand. The hires in operations will fulfill this demand, and our increased R&D headcount will accelerate our innovations. We have expanded our headquarters in San Jose and opened offices in Dubai and Japan, adding critical sales and support staff to extend our international reach and presence. One hire in particular that I'm excited and want to welcome to the company is Billy Brooks, who is our new Executive Vice President, Sales for the Americas. Prior to joining Bloom Energy, Billy served as the Executive Director of Business Development at NextEra Energy, Inc., a provider of clean energy solutions and services. where he oversaw the development of utility-scale solar generation assets. And he was key energy executive with General Electric in the United States and abroad, including CEO of Latin America, head of global sales, and chief commercial officer. Welcome, Billy. I want to emphasize that we are making progress on our over three football field size manufacturing facility in Fremont, California, which will enhance our production capability and be the factory where our 7.5 fuel cell columns are made. These developments and investments reflect our confidence in our future and our focus on growth. With that, let me turn it over to Greg, who will go through the financials.

Thanks, K.R. Yes, we had a busy quarter, and we've accomplished a great deal in the first half of 2021. I'll go through each of these in more detail, but I wanted to give some highlights. We achieved record acceptances in revenue through the first half of the year. We made progress on our technology roadmap to deliver our new products to markets. We continue to invest in our commercial capability, both in the US and internationally. We commenced the build out of the manufacturing capacity needed to meet future demand. As we emerge from the pandemic, like other global manufacturing businesses, we've experienced some supply chain pressures. The team's relentless focus on cost reduction has enabled us to offset these pressures to roughly hold our product costs flat over the last few quarters. Given the strength we're seeing across our business, we are reaffirming all of our 2021 targets. First, let me go through our financial performance. We are proud of how the business is performing and that the progress we've made relative to the milestones that we laid out for you at Analyst Day and the foundation that this creates for us for 2022 and beyond. Please note, we've kept the format of the earnings release and the supplemental information like previous quarters. And I'll be referring to the slide presentation posted to our website. Building off last quarter's momentum, we continue to have strong growth versus the prior year. Although, as expected, our mix of accepted deals this quarter impacted margins. This is one of the reasons why I've encouraged you all to look at our business on an annual basis, not simply quarter to quarter. We achieved record second quarter acceptances in revenues. Acceptances of 433 were up 41% versus the second quarter 2020. Revenue totaled $228.5 million, up 22% versus the second quarter 2020. On last quarter's call, I spoke of the challenges of the tax equity market and the revenue timing risks of having financing to support our second quarter acceptances. I'm pleased to report the team worked with our financing partners to provide financings for 23 megawatts in the second quarter. The completion of these financings is a testament to our partners' relationship and our attractiveness of our offerings. In the second quarter, our non-GAAP gross margins were 18%, increasing 1.5 points versus the second quarter 2020, but down roughly 12 points versus the prior quarter. As I outlined on last quarter's earnings call, the reduction in margin was expected with a mix as the primary driver. In the first quarter, we had very few U.S. installations. In the second quarter, we returned to our historical level of installations, negatively impacting our non-GAAP gross margins. These results reinforce our efforts to find U.S. EPC partners to perform future installations. Also within the quarter, we had a 10 megawatt legacy development project secured in 2018 at a lower initial margin. The project will earn 20% service margin over the next 20 years, ensuring that the overall project is profitable. This project is an outlier and not indicative of the project profile of the rest of our backlog. Also, as I mentioned at the opening, we are experiencing some product cost pressures tied largely to the realities of global manufacturing business emerging from the pandemic lockdowns. While overall product costs were down 5% versus the second quarter 2020, they're relatively flat to the last two quarters. We are being impacted by increases in freight and pressures on our component manufacturing costs. While we expect most of these pressures to be temporary, they are likely to persist through the remainder of the year, creating two to three points of non-GAAP gross margin pressure. We've implemented initiatives to offset these cost pressures. As examples, we've consolidated our shipments from Asia, we've priced heads or commodity purchases for the remainder of the year, partnered with our supply chain to reduce material costs, and formed cross-functional teams to lean manufacturing costs. So far, we've been successful in offsetting increases and keeping our product costs roughly flat. A fundamental tenet of our business model is to reduce our costs. And as we exit the post-pandemic environment, we remain committed to reducing product costs to support our growth strategy. Non-GAAP operating expenses increased in the second quarter to $64.7 million, up $22.8 million from the second quarter 2020. The primary drivers of the increase are our continued commitment to expand our commercial capability, invest more aggressively in our technology, and ensure our control environment is ready to scale as we grow. We have significant confidence in our ability to grow our business across geographies and product lines, and we've made several investments this quarter to accelerate our strategy. Commercially, these include strengthening our go-to-market sales strategy, processes, and talent in the U.S. and international markets, conducting a detailed analysis of tariffs in new U.S. markets, and adding international commercial resources to support our expansion and growth. Within technology, we're adding engineers and investing in product materials needed to support innovation for our growth levers. For example, we are building and deploying demonstration units. Within our investments in our control environment, we've added technical expertise in our accounting, compliance, and regulatory functions and are leveraging external resources to meet the current operational needs. While the increases in headcount are now within our expense base, many of our external investments are project-based and will not repeat. As such, we expect operating expenses to decrease in subsequent quarters. For the year, I expect 2021 non-GAAP operating expense as a percentage of revenue to be comparable to the prior year. In the second quarter, we had a non-GAAP operating loss of $23.6 million, adjusted EBITDA loss of $10.9 million, and adjusted EPS loss of $0.23. These losses were the result of lower non-GAAP gross margins with an increased investment in our non-GAAP operating expenses. With respect to cash flow and debt analysis slide five, CFOA was a positive $53.7 million for the second quarter as we executed the customer financing vehicles to fuel top line growth and improved our working capital. Our total cash balances improved $34.8 million versus the first quarter 2021 to $400.5 million, while recourse debt remained relatively flat versus the first quarter at $300 million versus the second quarter Last year, our recourse debt has been reduced $106 million, reflecting our last year's deleveraging accomplishments. We've had several technology efforts underway, and I want to provide a brief update to our CMO, Sherrilyn Moore's presentation last quarter. As KR laid out in the lead, we are on track for our 2021 milestones that position us well for 2022 and beyond. We continue to make progress in operationalizing the fifth generation of our energy server, Bloom 7.5. The servers are performing according to specifications, and we continue to put more units in the demonstration service to gather performance data. As we've previously discussed, we make our stacks in Sunnyvale, California, and perform our final manufacturing assembly in our Newark, Delaware facility. To meet future demand, we need to add additional stack manufacturing. Bloom 7.5 is being operationalized in our new facility in Fremont, California. This facility is large enough to add several stack manufacturing lines, and we expect to build over one gigawatt of fuel cell stack capacity in the facility in the coming years. While we expect to operationalize our new manufacturing through 2022, it's become apparent that we will require additional capacity to meet 2022 demand. Beginning next year, we can leverage a portion of our Bloom 7.5 investment to manufacture roughly 25% more Bloom 5.0 stacks. Once we've created enough Bloom 7.5 capacity, we'll allocate back this tooling. This short-term shift will allow us to meet demand while providing the time we need to operationalize Bloom 7.5. A few weeks ago, as K.R. highlighted, we unveiled the Bloom Electrolyzer. the most energy-efficient electrolyzer to produce clean hydrogen to date, with commercial shipments expected in the fall of 2022. We are also excited that we'll be shipping our first electrolyzers to the U.S. Department of Energy's Idaho National Laboratory in the third quarter to test the use of nuclear energy to create clean hydrogen through the Bloom electrolyzer. And reflecting our commitment to move quickly from innovation in the lab to capitalizing commercial opportunities, we're working with several customers on renewable natural gas, or biogas, and should have our first and second on-site installations commissioned and announced in the coming months. Our carbon capture technology is performing as expected in the lab, and we are working to secure a demonstration this year. As I previously noted, Our platform approach provides us with a clear competitive advantage due to Bloom's unique technology and its flexibility to address multiple market opportunities by leveraging the same platform for different end customers' needs. As we've previously discussed, we do not expect the new products to significantly contribute to 2022 revenue, but they are imperative as we expand our product offerings to meet our customers' needs. Importantly, this approach enables us to expand the base of clients across multiple products, industries, and geographies, which are key to our growth and ensuring that we have diversified revenue stream to drive profits and create value for our shareholders. While we only provide bookings and backlog annually, in our pipeline, we continue to see increases in commercial momentum for our current product offerings, our always-on energy server, with a greater percentage of large megawatt opportunities in that pipeline. The pipeline reflects the changes we've made to include new states, international opportunities, and focus on larger transactions. As KR discussed, we are very excited to have Billy Brooks join the team as our USC&I sales leader and are already seeing the benefits of his leadership. Internationally, Aziz Muhammad's team is gaining traction in finding partners and identifying potential customer needs. We are encouraged by this progress and look forward to moving these and additional opportunities through the pipeline and into bookings. On slide seven, we highlight our 2021 outlook, and we are reaffirming all of our 2021 targets. For revenue, we expect between $950 million to $1 billion, depending on the timing of a few late-year projects. We are managing through our supply chain pressures, and I believe we will achieve our total year non-GAAP gross margins of 25%. We will continue to invest in our capability while targeting our non-GAAP operating income of roughly 3% of revenue. We are encouraged by our cash flow performance in QQ and maintain our outlook on CFOA as approaching positives. While we do not provide quarterly guidance, and I stress our business should be looked at on an annual basis, there are a few aspects of the third quarter that I wanted to highlight. These are accounted for in our 2021 framework and do not change our yearly targets. Based on likely project completions, I would expect third quarter revenue to be similar to second quarter. I'm expecting a slight improvement in non-GAAP gross margins that should result in similar improvements in op margin and EBITDA. Our business is always more weighted to the second half, particularly the fourth quarter. Given the expected timing of project completions, I'd expect this year to be no different. In summary, we had a very strong operating performance in the second quarter, and in the first half of the year, we are very confident in our future. We are gaining momentum in our commercial operations, and we are seeing opportunities with new customers and new geographies. We are investing in technology, manufacturing, and front-end origination teams to continue to expand our platform and meet our customers' needs. Our service business is improving its demonstrated and profitable results. We feel Bloom Energy is well-positioned and has the platform, products, and team to be a leader in distributed generations. Simply put, we believe there is no other companies in our sector with platform-like products that offer the fuel flexibility and decarbonization that's driving robust, high-quality pipeline of deals and real revenue. We're doing this with a real focus on disciplined financial management and operational excellence, which creates value for our shareholders. With that, operator, let's open up the line for questions.

Thank you, sir. We will now begin our question and answer session. To ask a question, you will need to press star 1 on your telephone. To enroll your questions, press the pound key. Please stand by while we compile the Q&A roster. And speakers, our first question from Steven Bird of Morgan Stanley. Please go ahead.

Hi. Good afternoon. Hope you all are doing well. Steven, how are you? I'm doing well, thank you. Thanks for the thorough update on a lot of topics. I wanted to talk first on carbon capture. You gave an update during your prepared remarks, and I'm thinking about sort of the next steps for you all on carbon capture. I think you mentioned a pilot. Is it likely you would start by kind of showing the capability of this technology on kind of a small-scale pilot before broad deployment, or is there any chance of customers wanting to begin to kind of roll this out more broadly? How should we think about kind of the cadence of that development?

So the cadence that you would see would be, as you said, a pilot that we would start with, with the clear intent of it being in scale. Again, Stephen, as you know, anything and everything we do in Bloom is about can we really move the needle, both on the commercial front in terms of it being meaningful, as well as on the carbon footprint for the world where we are able to make a big dent on it. So obviously carbon capture in hundreds of megawatts in every single place is the way to be thinking about this. That is the scale at which it has to work, not in a laboratory, not in a test tube. It has to be working in these large scales. But with our utility partners that we will partner with, as well as with some of our commercial partners that we are in engagement with now, we want to start it at the megawatt scale. But clearly, it's going to take stage slash federal support. And we're very encouraged by what we're seeing in the infrastructure and the reconciliation bills. I think one of the common areas where Democrats and Republicans both agree upon is ways to figure out carbon capture with natural gas. So we see this as a great sweet spot. And with these uh proclamations or uh with these things looking more and more likely to be enacted into law we should clearly expect that the large utilities want solutions like what we have and we will start with the pilot with the goal of getting there faster as quickly as we can that's really helpful and you mentioned uh federal support i

Thought I'd touch on that as well. I'm curious your thought on, I'm thinking about the broader reconciliation package, frankly, though perhaps I'm not giving enough credit to the smaller bipartisan package, but the broader package may include some fairly large elements of support for hydrogen, for green hydrogen as well. I was curious, you know, your view on what that might do in terms of your

rate of growth the deployment of electrolyzers really any other business impacts you you you see to the extent that uh that that that became law so at least in what we are finding out from the early days uh of what we are reading and what we are hearing on the hill is there is a clear understanding that in this area of hydrogen uh it is of national importance of national importance, not only for us in terms of climate change and decarbonization, but it's a competitive advantage for all our industries. It is also viewed as a technology in which we need to gain leadership to be a leader in this country and therefore American companies with American technology, with American manufacturing jobs, getting the credit it needs to get. So if you look at the box and try to check it off, Bloom is an American innovative technology. Bloom is an American manufactured technology. And what we do at Bloom with high temperature electrolyzers and how we are able to integrate it at commercial scale, we have a leg up on everybody else. So you put those things together and then take into account hard to decarbonize industries like steel, like chemicals. And we are able to combine that, the advantage our U.S. industries can have because they have a green product to sell to the world. These are the reasons we are extremely bullish about what those policies will mean for our future growth. It is necessary. It's the right thing to do. I think it is an investment that the country is making, and it's the right investment for the country to make.

Understood. And then maybe lastly for me, just going to the financial results, the ASP number, Greg, you gave some color around that. I'm trying to think through that in terms of mix, and you had mentioned the impact of that, I guess I think of it as a legacy or an older contract. impacting that. Can you just touch on that a little bit? What I'm thinking about is the ASP did fall meaningfully. You're keeping product costs flat, but you're not in this environment able to reduce the cost, which is understandable. But I'm just trying to decompose that ASP impact and think about what that might look like going forward.

Yeah, yeah, Steve, I'll give you a little context on that. You know, year over year, our product costs are down 8% for the first half. So we're proud of the progress the team has made. We are on versus our expectations. We always like to be down double digits. But we were down significantly in the first quarter and down in the second quarter year over year. And to your point, we were flat the last couple quarters. Listen, on the one deal in particular, and it did impact margins and it did impact sales price, It was an outlier deal that was in the backlog previously. It's part of our backlog and financial framework for the year. So I tried to give you guys some sense of that on last quarter's call that we were going to do it. Listen, we got some pretty important relationship with that transaction with somebody that we think we can grow with going forward. And we've learned a lot around the project development flow. But as I take a look back through the backlog, we've got no other deals that look like it. So it truly was an outlier. And as part of the framework for the whole year, it's just a little bit, its impact this quarter comes through both in ASP as well as in margin.

Very good. I'll pass it on. Thank you.

Thanks, Stephen.

Our next question from Mark Strauss of JP Morgan. Please go ahead.

Yeah, good afternoon. Thank you very much for taking our questions. Just wanted to go back to the comments around finding EPC partners for installations. Can you just give us a bit more color there how those how those conversations are evolving and what your current expectations are for when we could start seeing some of that start to occur and maybe some less variability in your margins as a result.

Yeah, thanks, Mark. And again, Craig, congratulations on your promotion. So it's good to hear your voice. Thank you. On the EPC stuff, we've made a lot of progress. Joe Tevi and the team who runs our installation group has done a lot of the legwork that we're going to need in order to engage with third parties and make sure that we're able to provide to them a level of standards that they're going to need to be able to do the installations outside of our business. The other place where we've made a tremendous amount of progress is through the front end with Sherrilyn Moore's team on the marketing side and really looking for partners that can bring in not only the expertise around EPC but broaden the relationship as well. Think of them as channel partners or as a financing partner or as a technology integration partner, somebody that can really do it. If it's just somebody who's trying to replicate what it is that we can do, they're probably not going to be able to do it at a cost lower than we can. So we really need to find something that's going to create a lot of value for it. If you think about timing, and this is one of the things that's a little bit frustrating as you look at some of the things that are coming through the business now, we need to, one, secure those relationships, but two, is given our installation cycle, it'll be another six or 12 months from the point in which we award a project to a third party until they're able to go do that. We do use EPC partners today in some of our larger projects that are contracted by our customer, but it will be a different from us. I think you'll probably see if we're on track, you'll see one large project done with a partner this year. And then as you start to move into next year, you'll begin to see probably some of our more standard, smaller size, smaller kilowatt, installations get done through a partnership with somebody who can do it in a region or for a specific customer. And then I think as you get through the course of next year, I'm hopeful that they'll be able to take a larger percentage. But for about everything but maybe a deal or two that's in our current project pipeline for installation this year, those are primarily going to be started by and finished by our Bloom team.

Okay, excellent. And then, you know, Grand scheme of things, it really doesn't matter if a project comes in late December or early January. But just thinking about your guidance and kind of the risks to the upside or the downside, can you talk about the magnitude of some of these larger projects that you're calling out? I mean, worst-case scenario, if none of them come in, is there risk below your guidance or vice versa? If they all come in, is there risk above your guidance range?

Yeah, so there's a couple, two, three deals, I would say, that make up the difference between the 950 and $1 billion. And as I look through those, is there a risk that each of those deals don't happen? There's always a risk that any project doesn't happen. But given where they are from a timing standpoint, and as I look at it versus the late December, early January, that truly would be the difference around those. And from an upside standpoint, listen, we are sold out on the amount of systems that we can manufacture and get installed over the course of the year. So I still think as you think about upside to that billion, it's going to be really as we get into next year and have the opportunity with more capacity aligned to really help facilitate a number for growth next year above where we are this year.

Okay. Very helpful. Thank you very much.

Thanks, Michael.

And speakers, our next question from Mahib Manloy of Credit Suisse. You may ask your question.

Hey, good afternoon, and thanks for taking the question. Maybe if we can just probably, Greg, talk about the electrolyzer opportunity. And it did announce the new product launch and the pilots in South Korea and the one later this year in the U.S. teams on track. So wonder we understand what feedback you're getting from initial discussions with customers on the electrolyzer opportunity and how should you think about the uh the revenue recognition maybe in 22 or in 2023 today uh my name is kr and again i think congratulations are due on your promotion too and uh you know congratulations nice to hear from you look with respect to hydrogen

We are super excited about the things that we're doing today, right? Look at the announcements that they made. This quarter, we are shipping a unit to the Idaho National Laboratory. This is both from a speed to market on hydrogen, as well as a lifeline for zero carbon nuclear power to be more economical for the entire nuclear industry. It's a big step. This is the way the U.S. Department of Energy, side of the National Laboratory, and the Department of Energy is thinking about it. Because our high-temperature electrolyzer, with this team, and the potential possible integration of the future in the daytime, nighttime, arbitrage, nuclear power plants not running at full capacity during the day would be a huge economic drain to them. whereas if they can make hydrogen during that time when the sun is shining and the solar is providing electricity, it's a huge win. And it is zero carbon hydrogen. And it can be made in large quantities. And it can be these hydrogen projects can go on in industrial sites that are already cited for nuclear power plants and things like that. So if you just look at it practically end-to-end the entire system, you can appreciate the importance of it. So at Bloom, we are very deliberate of the many opportunities that come knocking at our door every single day to only pick and choose the ones that we have conviction on. So it is not the amount of opportunities that come to us. It's the ones we choose to say as to. That's the hard part. The second announcement that we made is HelioGem. And again, you can use heat and electricity to make hydrogen, you can only use heat and electricity in significant quantity, the heat part, in high temperature electrolysis, which is the blown electrolyzer. Any place that is custom built to build a large solar array for hydrogen production, and that's the only way we are going to make any dent in the hydrogen market, is millions of acres of renewable projects. trying to offset the 100 million barrels a day worth of oil equivalent. These are not small numbers, these are scale numbers. They will happen in very sunny areas and concentrating that heat and using that heat as a substitute for electricity for a significant material portion of the energy needed is a game changer because 80% of the hydrogen production costs are energy costs. That's why we're excited about that opportunity. Working with Baker Hughes and working with potentially steel, other manufacturers that we are in talks with to use the waste heat coming out of that process and decarbonize that hard to decarbonize industry. So our focus right now is going after those segments that economically and from a dollar invested to the decarbonization impact it has, the maximum impact hydrogen can have, and that is just our focus. That's what we're focused on. We are in this for the long game. We have a clear strategy. But what we're doing today, even with our early prototypes, is far ahead of anybody else in the field.

That's really helpful. And maybe for one small one, housekeeping, just talk about the concern of financing in Q2. Could you just remind us of what that was related to? Was it tax equity or something else? And how should we think about those financing arrangements for the second half or going forward in 2022?

So if you remember last quarter when we went through it, we raised the risk for our second quarter acceptances, making sure that we had our financing vehicles, our PPA-type structures in place in order to facilitate those acceptances. Coming out of 2020 and into this year, our traditional provider had decided not to participate going forward, which was OK. We had already begun the process to work with other providers. But the team did an absolute amazing job, not only not only our team but our customer with the the facing teams off to us to our provider side the teams were incredibly engaged through the course of the quarter we worked through a series of uh just negotiation issues and other things and secured the tax equity that we needed. And what we said at the time was if we solved the quarter, we basically got the year solved. So as we look forward for the second half, we don't nearly have that effort in front of us, and we're really happy with the providers previous transactions others were new that we brought we brought to bloom and we see them as resilient uh uh sources of capital as as we go forward so we're very excited about the progress that our team made and the relationships we built there yeah that's good all right uh thanks a lot thanks our next question from michael blom of wheels fargo you may ask your question

Thank you. Good afternoon, everybody. I wanted to talk about your announcement you made at the end of July on the marine space with Samsung. Just one thing about your progress in that arena. Does that announcement signal that you're ahead of schedule with commercialization? Are you on schedule? I'm just basically looking for an update on your commercialization efforts in that arena in light of the announcement. Thanks.

Yeah, this is . Let me answer that question, Michael. So when you look at when we started with Samsung and we were looking at trying to get at least one approval, and this was the approval in principle with BNB, which is an international maritime classification society, highly prestigious. It came sooner than what we had originally had in our timeline. And that is kudos to our engineering team and what they were able to accomplish working with our partners. And that's a big step forward. I would say that's a very big step forward. But when we put that announcement out, what we found out is there was significant interest from other shipbuilders in different classes. So if you look at our announcement with our partner, Samsung, that is for cargo ships. And that's a big deal because 80% of the world's economy moves on ships. And if we're a country, in terms of emissions, it'll be 6% in that list of CO2. So that itself is a big opportunity. But outside of cargo ships, the maritime industry is very big. And we started getting inquiries from other shipbuilders in other continents. And, you know, including, you know, passenger ships and other kinds of ships here in the U.S. So, you know, cruise liners. So what we had then was the American Bureau of Shipping is a very important entity, which is, again, a global certification and technology advisory services. And we went to them and tried to simultaneously get an approval. And what we got from them, ABS, which is the American Bureau of Shipping, is a new technology qualification. And that's what we got. So again, it speaks to, so the final approval will be expected in this case of ABS in 2022, which will be much sooner than we had originally planned. We think this industry is primed, and there is a tremendous push from the consumers for this, as well as the International Maritime Organization. But on top of that, And our solution future-proofs them. They can go from the really dirty heavy oil that they're using today to a much cleaner natural gas, which can be even used portside. But in the future, whether it's hydrogen or ammonia, we are future-proofing them. And not too many technologies can do that. We believe we are the best option for this. This is the reason why we're seeing that heavy fall.

Great. Thank you for all that. That's all I had.

And our next question from Noel Sparks of Tui Brothers. You may go ahead.

Hi, good afternoon. Just a couple of things. I was wondering if you could talk in general terms about the biogas projects you're working on, just a little bit about what those applications are like. And I'm curious in particular about the sources and whether they are, for instance, like well-established sources like landfill, for example, or something new or like a new implantation specifically to take advantage of fuel cells.

No, we believe that the whole renewable natural gas, you know, biogas is part of this, right, is probably the fastest, quickest way to get to geocarbon baseboard power in scale, especially for mission-critical applications. So they fall in three different categories. Think of solid waste coming from landfills, Think of wastewater treatment plants and water treatment plants that put out sour gas. And think of dairy and animal waste, right? So if you take those, each one has its characteristics. But what is common to all of them is in the absence of there being a commercial opportunity for them, a lot of methane. which is significantly more harmful to the atmosphere than CO2, is going to go into the atmosphere. So if you want to decarbonize, finding a way to trap that is probably the most important thing. And then the next thing you do is, what if you can use that in a highly efficient way with no air pollution, no water use, and create reliable power? So we are excited about three opportunities here. We are, as we said, with a large Silicon Valley company, and we'll be talking about it soon in the months to come, doing a project which is operational of taking landfill gas and producing power. We see an enormous opportunity in wastewater treatment plants. because the amount of gas that comes out is sufficient to operate the wastewater treatment plant with all its electricity needs and thereby bring in resiliency. It's not only a decarbonization play. It's not only a biogas play, but it's essential for our everyday life. When there is no power, you can drop bottles of water for people to drink. You can drop food from helicopters. If your toilet doesn't flush, there's not a whole bunch of options you have. Okay? It's essential for everyday life, and that's what we can bring to the table. And we will very soon be talking about some dairy projects where we are able to use the animal waste and use that gas to be able to do our systems. And the beauty of our modular system is we don't need very large scale facilities to make this operational and economically wise. We can go small and medium scale there and be able to implement this and get that power out. I think there is a huge opportunity. We're excited about it. ULC is trying to grow this field in the future.

Great. Thanks for that update. I was interested in your discussion about the pipeline and the backlog. You mentioned that you were seeing an increase in commercial momentum, which sounds great. And I'm just curious, at this stage, in general terms, your sales and marketing costs per deal signed or given the size of a deal, I assume we're in a trend where that probably would be, um, heading higher as you sort of walk through the, you know, the horizons on the, on the backlog, and then maybe hitting a point where it trends lower. Can you give any, any insight on just, you know, what it's, what it's costing to, uh, sort of source and close a deal these days?

Yeah, no, it's Greg. So, so we think about it, right. And we look at the pipeline and we're really happy with the progress that the team's making and expanding. in the U.S., as well as the thesis team, is expanding internationally. And the cost that drove this quarter really was around making sure those teams had the analysis that they needed, the materials that they needed, the coaching that they needed, all those things. And we think that converts in from – in the pipeline and what's in pipeline in the bookings over the course of the next six to 12 months as we go forward. So I don't think it is as much as like I would in a consumer model where you've got acquisition costs tied to each amount of advertising you put in place and what dealings secure. This is really about making sure we were accelerating the progress that we see and the opportunities that we see. And we're getting more and more confident in how that looks every day. So thanks, Noel. So I think we've run out of time. We still had a couple more questions we wanted to get to. I apologize for not getting to everybody who was looking to ask a question. I'll say a couple of comments here in just closing. We had very strong performance this quarter in this first half of this year. We're happy in how we are executing and putting the backlog into revenue. We are gaining confidence, as I was just talking to Noel about, in our pipeline and what we're seeing there. And it's giving the confidence for us to invest in our technology, in our manufacturing capabilities, as well as continuing to hone out our front end operations. in commercial resources. We're reaffirming our guidance for this year. um we are confident that we can offset any cost pressures that we're seeing and deliver on the gross margins that we've had we're going to continue to invest in those opportunities and are still targeting a three percent operating margin and i'm getting uh more confidence based on the second quarter performance that we had around our cash flows around how we're expecting those for the year although i'm still holding uh i'm still holding approaching positive as uh is our targets uh and look to update as we go forward so i want to thank everybody for their interest in bloom thank everybody for their time and we'll look forward to getting back together in 90 days talking about third quarter performance thank you this concludes today's conference call thank you all for joining you may now disconnect