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spk02: Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press star 1 on your push-button phone. I would now like to turn the conference over to Eric Bylin. Please go ahead, sir.
spk11: Welcome to ESS's 2021 Fourth Quarter Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhaus, CEO, and Amir Mafikar, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fourth quarter of 2021. This earnings release is available on the investor relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2022. The forward-looking statements that will be made on this call are based on information currently available to us as of today. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, the markets, and the economy. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain items that are not indicative of our core operating results. Management uses non-GAAP measures internally to understand, manage, and evaluate our business and make operating decisions. Reconciliations between US GAAP and non-GAAP results are presented within our earnings release. And with that, I will turn the call over to ESS's CEO, Eric Dresselhaus.
spk05: Thank you, and welcome to ESS's first earnings call as a public company. I will start today's call by giving you some context on the market, then share some details on our fourth quarter performance and product deliveries, and then discuss our go-forward plan. after that i will hand off to amir to discuss financials and our outlook 2021 represented an unprecedented transition not only for ess but also for long duration storage the forecast for long duration storage at the beginning of the year were dwarfed by those exiting the year and the momentum is not slowing it has become abundantly clear that scalable safe grid storage that lasts for more than four hours is imperative to moving to a clean energy future. In the past, storage has meant lithium-ion because it was the only available technology. Now, with continued proliferation of intermittent renewables like solar and wind, the need for storage that can discharge over six, eight, and even 12 hours has become imperative. The acceleration of storage installations supporting longer durations and more varied operating environments and use cases is the catalyst for the industry to move from legacy technologies to those that were tailor-made for these applications. And it's easy to find evidence of this transition in the news on a regular basis. Just last month, California dedicated $380 million to support long duration energy storage projects over its next two fiscal years. These funds are targeted to support grid reliability, adding resilience against emergencies such as wildfires, certainly applications of lithium ion is not suited for. Our project with San Diego Gas and Electric is a great example of this coming to life. Long duration storage paired with renewable generation to provide resiliency to critical infrastructure while also helping to safely decarbonize the grid. In November, the newly formed Long Duration Energy Storage Council released a study with McKinsey delineating the needs for long duration energy storage, focusing on the need for storage that can discharge for more than eight hours. Among the findings, the authors concluded that by 2040, LDES needs to be scaled up to 400 times present day levels to between 85 and 140 terawatt hours of capacity, which would require between 1.5 and 3 trillion in investment. Leading companies such as Microsoft, Google, Shell, Rio Tinto, and dozens of others have joined the council, highlighting the importance these large energy users and producers place on long-duration storage and its place in driving the energy transition. And finally, earlier this month, the state of California approved plans to add over 25 gigawatts of renewables and 15 gigawatts of storage by 2032, effectively raising the state's renewable portfolio to 73%. But this is not some promised land off in a distant future. The inbound inquiries we receive continue to rise and the quality of the opportunities behind those inquiries is improving as well. These are organizations that know that the future entails a move away from lithium ion. And although we have only recently begun to build our sales and marketing efforts, we already have direct visibility through customer relationships into vast opportunities that have grown almost exclusively from inbound inquiries. There is an undeniable need to solve for long duration storage. And while the flood of LDS demand has brought new technologies into the fray, we remain confident that we have the best solution across cost, reliability, safety, environmental friendliness that can be deployed in the market today and comes with UL certification for battery modules, energy storage systems, and fire safety. We believe the design work that got us to this point was ingenious. Our iron slow battery technology is relatively simple to build reliable and has at its core very inexpensive input components for a grid storage system, iron, salt, and water. ESS separates the power from the capacity, which makes this even more economical at longer durations. With zero capacity fade over 20,000 cycles, our technology carries the additional benefit of being environmentally sustainable and non-flammable. Moving on to our fourth quarter results. While we did not recognize revenue in Q4, we were able to make material progress with customer deliveries, new sales, and ramping our operations. We began shipping our second-generation energy warehouses in the third quarter of 2021, and the first units were delivered to three separate customers and installed in the fourth quarter of 2021. However, these were our first commercial units to ship, so our revenue recognition process will be slow and deliberate. Initially, revenue recognition will be deferred until customer acceptance has been received for each unit or until we establish a history of successfully obtaining acceptance from customers. In the near term, as our products are new, this is likely to be a longer process than when our products are more mature and we have more history with customer acceptance. We expect to improve our process for recognizing revenue more quickly in the future. We've learned a lot about how to accelerate our testing, prepare the customer sites in advance, and be more efficient in our startup. These learnings will help us bring up customers' applications more quickly, not only so that we can recognize revenue, but also so that the customers can receive the remarkable value of our solutions even faster. While we feel fortunate that the groundswell that has brought long-duration energy storage to the forefront, just as ESS has moved to scale production, that timing has also coincided with unprecedented supply chain challenges that have slowed our initial shipments of energy warehouses. As examples, we faced limitations with some injected molded parts, as well as challenges securing certain electronic components. We are in the process of working through each of these. We are broadening and strengthening our supply base and redesigning PCBs to leverage more widely available components. Importantly, however, we see these as short-term constraints. In the near term, we have a handle on these issues and while they caused a delay in our ramp, we believe we can put them behind us and anticipate a trajectory of strong growth. With that said, it's a great accomplishment by the team to get units to customer sites and pass the heavy regiment of testing that have been demanded of them. Three units are fully operational and running at a commercial customers campus in Southern California and at SoftBank's testbed in Northern California. Additionally, the first two units we shipped to SDG&E are awaiting testing. We're excited to have undertaken this next chapter and continue to prove that ESS's solution can help solve the grid storage challenges. We also continue to make considerable progress building out the operations of the company. We doubled our company headcount in 2021 to 161 and have added almost 25% to that since the end of 21. Importantly, we were able to add Ben Heng as SVP of Engineering. Ben brings broad technical background to the team and has held leadership roles at both SolarCity and Tesla. We are building out our sales team and announcing new customers. Additionally, we added 54,000 square feet to our Wilsonville facility in the fourth quarter, which helped us double our total footprint to 200,000 square feet in 2021. Given the supply chain environment, we have adjusted our production plan for 2022. We continue to plan a significant ramp in our energy warehouse shipments as well as commencing shipments of our Energy Center product this year. Although the pace of growth will be considerable from quarter to quarter, we expect that the supply chain challenges we faced over the last four or five months will shift our production ramp to the right. This will represent a little more than a one-quarter shift in our expectations. Amir will share more details on the specifics of the plan. We will proceed with two cost reduction initiatives planned for this year, each of which is independent of our ramp speed. The first is standard design for manufacturing activities, like replacing soldered connections with wire harnesses and redesigning PCBs with more common components to cheapen and simplify assembly. The second is to incorporate our advanced automation line to maximize our production capacity by the end of 2022. These initiatives are expected to lower labor inputs by more than 80%, dramatically lowering unit costs and increasing production velocity and quality. The change in production ramp is in no way a reflection of the demand for our products, our confidence in our production capability, or the overall trajectory of the business, but rather a prudent adjustment to our ramp in response to macroeconomic conditions. This adjustment will have the added benefit of allowing us to implement cost reductions over fewer unit shift, thereby minimizing cash burn. Importantly, we have been in close communications with our customers and shared the news of our new delivery schedule. To date, we have not had a single cancellation and our customers remain committed to the units they have ordered. Finally, I would like to welcome Claudia Gast to the Board of Directors. With over 15 years of strategic and financial experience across leadership roles at Fortune 100 companies and investment firms, Claudia brings valuable experience in bringing hardened industrial products to market and scaling commercial organizations. Claudia will replace Shirley Speakman of Cycle Capital, who led an early stage investment in ESS. We also want to thank Shirley for her years of commitment to ESS and her valuable contributions. And with that, I'll turn it over to Amir to take us through the financials. Thank you, Eric.
spk07: Now I'll review the financials. While we shipped five energy warehouses in the latter part of 2021, we did not recognize revenue from these units in Q4. Revenue recognition will be deferred until customer acceptance has been received for each unit or until we establish a history of successfully obtaining acceptance from each customer. In the near term, as our products are new, This is likely to be a longer process than when our products are more mature and we have more of a history with customer acceptance. As we are in the early stages of ramping the production of these units and are still under development accounting, we expense the material, overhead, and labor costs we incurred making the products we ship to date, resulting in zero cost of goods sold. Our non-GAAP operating expenses for Q4 were in line with our expectations at $15.5 million, With that, we reported Q4 non-GAAP adjusted EBITDA of $24 million in losses. Q4 GAAP net losses were $180.7 million, or negative $1.33 on a per share basis. Moving to the balance sheet, we ended the year with $238.9 million in cash and short-term investments. In the fourth quarter, cash used by operations was $23.5 million. As Eric shared earlier, we have adjusted our production and delivery expectations for 2022 due to the impacts and delays brought on by supply chain challenges. To a great degree, this decision was out of our hands as we were navigating an unprecedented supply environment that began to impact us just as we were ramping manufacturing. Given that, our focus on production for 2022 will be in three key areas. Deliver the units our supply will allow, execute the cost savings programs that were already in flight, and make the necessary CapEx investments to maximize our production exit velocity at the end of 2022. Let me touch on each of these. First, despite our supply chain delays, we will continue with a strong ramp of our energy warehouse production in 2022. As a result of these delays, our planned shipment schedule is now a little more than one quarter later than we have previously expected. We remain on track to deploy our first Energy Center product in this fiscal year. Given our experience at early deployments and some legacy contractual terms in existing deals, we believe we'll see a varied level of delay between shipment and revenue recognition. In our current process, we perform factory acceptance testing for each EW at our Wilsonville facility ahead of shipping units to a customer. Once received, we install and commission these units when the customer site is ready. Finally, we perform additional acceptance testing protocols at the customer site, followed by a formal customer acceptance. For our early deployments, we expect revenue recognition to follow customer acceptance. As we build a track record of successful installation and acceptance, we expect customer acceptance and revenue recognition to occur more quickly. Given our new ramp schedule, we now expect to ship between 40 and 50 energy warehouses in 2022, all of which are contracted at this point. If we ship all of these units and are able to recognize revenue for them, this would translate to approximately 10 million in revenue. Second, we will execute plans to reduce our cost of goods sold in each unit. A significant portion of our cost reductions are design improvements that are not dependent on our scale, but reduce labor input and lower total production time. As Eric alluded to, these are designed for manufacturability initiatives we had already planned for this year. And third, as we shared last year, we ordered an automation line to dramatically expand our power module manufacturing throughput, a critical cause to ramping capacity. We expect this line to be up and running in late 2022. With each of these production improvements designed for manufacturability and automation in place with a healthy supply chain backdrop, our annual production throughput is expected to expand dramatically to 750 megawatt hours by the end of 2022, more than three times where we started the year. This would allow us to continue rapid growth into 2023. To reiterate an extremely important point, we have been very open with our customers about our delivery timing, and we have not received a single cancellation among our booked orders, nor have we seen any slowdown with ongoing customer conversations. I think this speaks to the value proposition ESS brings to our customers, as well as the long-term strategic importance of implementing long-duration storage in their applications. Given our current plan and the assumption that we will remain under development accounting for the full year, we expect our operating expenses to come in at about $100 million. As we execute our plan in the coming year, we have more than ample liquidity to run the business and expect to end the year well in excess of $120 million of cash on the balance sheet. And with that, we can open up the line for questions.
spk03: Thank you.
spk02: At this time, I would like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roister. Your first question comes from the line of Jed Dushma from Canaccord Unity. So, Jed, please go ahead when you're ready.
spk09: Hi. Thanks, guys. Wondering if you could just elaborate and provide some more details on the specifics of the customer acceptance. It sounds like, you know, three of the five are actually running. So, what... specifically needs to be achieved for that acceptance to occur for the Rev Rec. Thanks.
spk04: Sure. Thanks, Jed. I'll take it. You're right. We've shipped a number of units. At two of the sites, the units have gone through the full installation, commissioning system startup. And actually, as of the time of this call, one of those units is totally completed with its revenue recognition process. So that's full testing and customer sign-off. Another one we expect to be done in the next days to maybe a week. And then for some of the other units, they've been delivered. They'll go through that startup routine, and then they go through this very rigorous complete testing. When that's done, the customer signs off, and we get RevRec at that time.
spk09: Got it. Thanks. And, you know, you mentioned the supply chain and, in particular, chips. I know the containers were an issue at one point, but the chip issue sounds like that's a bigger, I guess, near-term headwind. Are there any others that you see as potential supply chain headwinds, or have all of the other ones been resolved and it's just about the redesign of the PCBs?
spk04: Yeah, thanks. No, you're good memory. We have at one point last year, we're having delays and getting shipping containers, but we were able to work through that. We've got plenty of containers now on the chips where we think through that problem. Now we had to do some redesign and slow this down back in the fall. But we've got alternative solutions now when we pre bought stock to not have that be a constraint. But you call out the right thing, which is these come up and you just have to work through them as they come up. So as we sit here today, we feel good about having the supply that we need. And as we said in the release, we're working hard to ensure that we have alternative sources of supply so we have a bit more robust supply chain at every turn.
spk09: Great. Last question for me, then I'll jump back in the queue. um given the learning curve that you've gone through or continue to go through with the ew i'm just wondering um you know has that changed any of the expectations around the ec um you know either positively or negatively as you as you think about that and uh and what you know now versus uh you know a year a year ago yeah i think it's modestly positive uh inclinations towards the ec in the sense that we're just getting more experienced
spk04: of all of the interface to our systems with renewable systems or grid systems out in the field. So the more experience we get, the faster we get at every turn. And so I think that'll help with ECs as they come online later this year.
spk06: Thank you. Thank you.
spk02: Thank you, Jed. We now have the next question from Colin Rush of Oppenheimer. So, Colin, please go ahead.
spk01: Thanks so much. Can you talk a little bit about how much of the manufacturing process is left to be codified at this point as you move towards automation? Is all the engineering done, or is there still some work to be done as process definition left?
spk04: Yeah, I think the engineering is done for the automation line that's coming online here this year. So I don't see any engineering on our side. Of course, we have partners working with us that are building out the line. So that design is complete. We're just waiting for all of the components of the automation to arrive.
spk01: Okay, that's helpful. And then as you build this pipeline of business, when you look at the pricing environment, we're seeing prices go up on medium-based solutions. Certainly there's going to be a tight environment for supply with chemical storage for a number of years. I'm just wondering about your pricing power here and how you're thinking about the pricing model as you go forward.
spk04: Sure. Well, I think our pricing approach has always been trying to work on really being focused on a value approach. What's the value of our solutions versus the alternatives or versus doing nothing? And so to that extent, as lithium prices have not only stopped declining but started to go up a little bit, I think that might give us a little bit of pricing power. But really, for us, it's more about making sure that our total value proposition is being appreciated out by the customers.
spk01: Okay. That's the follow-up, so I'll take it offline. Thanks, guys.
spk06: Thank you.
spk02: Thank you. Your next question comes from the line of Thomas Boyd of Cowan and Company. So, Thomas, your line is open.
spk08: Excellent. Thank you for taking my question. Just the first one, I was wondering if you could just give us an update, maybe on what the bookings composition looked like for 2023, you know, how much has been awarded, how much is still being negotiated and really what's in the kind of the qualification phase.
spk07: Yeah, good question, Thomas. Right now with just given the shift in the production schedule that we're seeing in 2022, you know, we're not guiding towards what's booked, awarded or negotiating right now in 2023. As Eric alluded to, you know, we continue to have healthy, robust conversations with customers. We do anticipate the EC shipments starting this year. So I think you'll see that shift in 2023 with the continuation of our EW product and the introduction of more EC projects. But at this time, we're not guiding to what's booked or awarded for 2023.
spk08: Understood. Then would it be fair maybe to just categorize maybe the pipeline? Is it still around $8 billion as it was in 3Q? I know obviously that things have continued to expand as far as overall demand is concerned. I'm just wondering about an update there maybe.
spk07: Yeah, so what we've shared is that our global opportunities are in that 8 billion range of customers that we've connected with for named projects that we have either exchanged some type of information such as an NDA or participated with them in an RFP. There is no shortage of those opportunities, and that pipeline remains robust. And now it's about our execution through that pipeline for both the EW and EC products.
spk08: Great. Now, I appreciate it. I'll ask him if I could sneak in real quick. Just, you know, what is the feedback that you've gotten from customers who have received the second generation unit that maybe have also had a chance or opportunity to work with kind of that first generation unit?
spk04: I think there's a lot of excitement around it. As we said, it's really a more hardened product. It's just at every turn, you know, a tighter product in terms of its delivery and its performance. So people are excited about that. I think, frankly, the other thing that's probably come up since the first generation products were shipped is that the awareness of the market need for longer duration and is you know more well known more acute today so people see the same product or same functionality and they're more excited about it than uh they've been before um you know one of the more surprising things that uh at least to me that that we've heard when we shipped one of the uh two of the two of the energy warehouses down to a customer in southern california and there's a video of this i think on the website the units were installed right next to the building and uh People, when they think about batteries, they think about something that's got to be remote, it's got to have a big safety perimeter, because with lithium, that's what you do. And I have just been amazed at how many people see that picture and their jaw hits the table and they can't believe that you can install long-duration storage in that easy a package. It gets hoisted into place, the system is brought up, and it can be installed so close to a building. And so with the wildfires and other kind of safety issues that you've heard out in the marketplace, that's the number one thing we hear about from people when they see the installation happen.
spk08: Excellent. I appreciate the call. I'll take the rest of the questions offline. Thanks.
spk04: No, thanks for the questions, Al.
spk02: Again, if you would like to ask a question, Press Start, then the number 1 on your telephone keypad. We now have the next question from Joseph Osher of Guggenheim. Your line is open.
spk10: Hi there. Hi, Eric. Hey, Joe. How are you? Hey, I'm good. I'm good. Just a couple of questions here. To go back to the guidance in that $10 million in revenue, and I believe that correlated to 50 EW units. That's what you said, right? Yeah, that's right. Okay. Now, is the idea that those would all be 50 units that were actually recognized for revenue? uh or is it more that you're going to have 50 units out uh by the end of 2022 but only some of those would actually have manifested at revenue as revenue at that point i just kind of want to understand what what what's being said here yeah what so what we've said is we expect to shift that many uh units how the rev rep will play out as we alluded to in the call is a little hard to predict um
spk04: if they would all get rev-rect or where that cutoff would be depends a little bit on time and how much we're able to accelerate that commissioning process to move through the revenue recognition process.
spk10: Okay, so that 50 units is kind of units that you'd like to have in the field by the end of the year and some of those will be recognized and some will not. Is that the best way to think of it?
spk04: Well, I would say that certainly we would expect the vast majority of them to be recognized. There'd be a question of whether they could all be recognized or not.
spk10: Okay, that's fine. And just to follow up on Jed's question, obviously the EC is kind of a different thing. Can we expect to see any of the larger form factor ECs in the field in 2022, you think?
spk04: Yeah, as you said, we expect to start shipping the units this year. Again, same question on revenue recognition. Will they get fully revenue recognized within the year? We've, at this point, not made claim to that. But we do expect to start shipping units this year. And as we've said, we expect that ramp-up will continue more dramatically as we get into 2023.
spk10: Sure. Got you. That makes sense. And then just nuts and bolts stuff here. You mentioned that you're expensing 100% of, you know, essentially 100% of the cost of some of these units that are in the field awaiting recognition. When you talk about that $100 million in OPEX for 2022 projects, Does some of that $100 million include the absorption of essentially product costs that are out there but not recognized yet? Or is that all like real OpEx OpEx?
spk07: Yeah, good question. So as long as we're under development accounting, the OpEx would also include the product costs and future inventory purchases we're making for future quarters or future years would all be expensed in that period. So that OpEx number includes the inventory and purchases for those products.
spk10: Okay. Would you care to kind of break that $100 million down in terms of that sort of product absorption versus, you know, like R&D and just kind of the, you know, normal course of business, you know, OpEx run rates?
spk07: Yeah, we've not guided to that and wouldn't comment on that right now. I think as we get our fully automated line up and running and the cadence of shipments finds its way to a more normal state of business, we could provide more guidance on that.
spk10: Okay. And then the last question from me, sorry to beat you guys up. When you do recognize revenue, Does some of that OpEx reverse back to COGS, or do you just have revenue with 100% fall through, or how does that actually work?
spk07: Yeah, so we'll wait until we get to that point. I mean, there's certainly the opportunity to recognize revenue without the COGS, recognize the revenue. and then the COGS would match the revenue or go to formal inventory accounting where you would see that. And, you know, we will guide on that when we get to that point.
spk10: Okay. Thank you very much.
spk06: Thank you, Joe.
spk02: Thank you. Do I know if there are other questions at this time? Mr. Eric Duffley? I turn the call back over to you.
spk06: Well, thank you all for joining the call today.
spk04: In summary, we're more excited than we've ever been to be delivering our solutions and contribution to the global effort to decarbonize the energy system. Governments and corporations have set ambitious goals and we are extremely well positioned to help them meet those needs. As a well-funded public company, We now have the resources to make that vision a reality. In the coming months, we encourage you to mark our progress with announcements on customer shipments, new projects, and continued expansion of our production facilities. Until then, we thank you for your time today, and we look forward to keeping you apprised of our progress.
spk03: This concludes today's conference call. You may now disconnect your line.
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