Energy Vault Holdings, Inc.

Greetings and welcome to Energy Vault's first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lawrence Alexander, Chief Marketing Officer for EnergyVault.

Thank you. Good afternoon and welcome to EnergyVault's first quarter 2023 earnings conference call. As a reminder, EnergyVault's earnings release and an updated first quarter earnings presentation is available now on our investor website. And we will be referring to the presentation during this call A replay of this call will be available later today on the investor relations page of our website. This call is now being recorded. If you object in any way, please disconnect now. Please note that Energy Vault's earnings release and this call contain forward-looking statements that are subject to risk and uncertainties. These forward-looking statements are only estimates and may differ materially from the actual future events or results to be a variety of factors. We caution everyone to be guided in their analysis of Energy Vault by referring to our 10Q filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. please note that we will be presenting and discussing certain non-GAAP information. Please refer to the Safe Harbor Disclaimer and non-GAAP financial measures presented in our earnings release for more details, including a reconciliation to comparable GAAP measures. Joining me on the call today is Robert Bocconi, our Chairman and Chief Executive Officer, and Jan-Keith Van Garland, our Chief Financial Officer. At this time, I'd like to hand the call over to Robert Bocconi.

Thank you, Lawrence. I'd like to welcome everyone to our first quarter 2023 earnings call. We have a lot to share today, including, as you've come to expect, some new announcements, but all of them focus on the key market and financial metrics that are driving long-term shareholder value for the company. I'd like to start, as we normally do, with what we're seeing in the market and what remains a very robust and growing market for energy storage solutions, along with the positive customer dynamics we are seeing. Of course, to discuss the market, this always begins with numbers and what we're seeing reflected in the movements through our near-term sales funnel. We've put forward a pretty strong commercial outlook going forward that's driven by our near-term funnel that grew in the quarter over 40% to about 37 gigawatt hours. This increase includes, notably, about $1 billion, or 2.8 gigawatt hours, of new project awards in the quarter. Of this amount, most of it, about $725 million, or 2 gigawatt hour, is related to our Gravity EVX energy storage technology. These near-term funnel dynamics give us very high confidence in our continued growth and future conversion into bookings. Almost all of our future bookings and new announcements this year will be about building the project revenue that will make up our 2024 to 2025 revenue and beyond. So I'm quite pleased to see this level of overall funnel growth and expansion and new project opportunities into the next three-plus years and highlight that our 2022 conversion rate from those awards already announced into bookings last year was very high, given our very experienced commercial, and technical team, and diverse set of capabilities that we bring to the table. And we expect to continue that trend in 2023. Moving on to our customer project execution in the quarter, and it really all starts there where we focus and deliver for our customers. We saw revenue in line with our expectations, driven by construction progress across our battery projects in the United States under a build, commission, and transfer model. As such, we recognized the revenue associated with that progress of $11.4 million, while exceeding our plan for gross margins, posting 21% on pure battery project execution, as well as finishing ahead of our internal expectations on a set of financial metrics, including adjusted EBITDA, net income and EPS, and cash on hand. As such, we're reconfirming our fuller guidance which is revenue of $325 to $425 million, gross margins in the range of 10% to 15%, and adjusted EBITDA of $50 to minus $70 million. Among the big headlines in the quarter is the race towards completion of the world's first gravity energy storage system that isn't a pumped hydroelectric dam. which is being deployed in Rudong, China and is expected to be the largest long duration storage system operating in the world this year. I personally visited the site in Rudong, China in March and witnessed firsthand the strong progress as some of the pictures you may have seen had shown. It's amazing to see that in just looking at the last four to five weeks since I was there, the recent pictures which we've posted in our investment presentation online today that already the system's increased six to seven floors in just that period. The system will confirm what we've already demonstrated on a full five megawatt scale in Switzerland in 2020, but this time on a larger grid scale of 25 megawatt, targeted at a four-hour discharge window yielding 100 megawatt hours of storage capacity. As commissioning begins this summer and into the fall, we will have that watershed moment when the 25-ton mobile masses of the gravity system will be moving up and down, storing potential energy, and later releasing kinetic energy with round-trip efficiencies that exceed 80%, making this the most energy-efficient mechanical or thermodynamic system in the world, as we had previously demonstrated with our Swiss system. Complementing Rudong, and on the other side of the world, right here at home in the United States, in Snyder, Texas, is a second gravity system under construction. This is an investment we are making to own this project, which will have a long-term tolling agreement with NL Green Power. Construction is progressing well to the site, piling, and now civil works coming up to the ground. Again, we have some pictures posted in the investor presentation of this project. It has a targeted completion for the second half of next year in 2024. And this investment gives us a domestic revenue-generating showcase for our gravity solution for all to see and allows us to realize significant benefits from the ITC portion of the IRA legislation, as well as benefits from domestic U.S. content. And finally, classification is an underserved energy community, which can yield up to 50% of future cash benefit in total IRA benefits and ITCs. China and Snyder and the two gigawatt hour gravity award I mentioned earlier are building global momentum for our solution. And quite frankly, in a market where there's a lot of talk about transformative technologies, our results are real and we are very proud to be the leaders and disruptors in a new and evolving long-duration energy storage market that is still quite early in its development. As has been highlighted by our diverse customer wins across short, long, and even ultra-long duration storage projects, our strategy is unique, and our gravity technology is a critical and proprietary component. We're the only company that addresses both today's market needs for shorter duration storage using higher density, more efficient battery system architectures, and the increasing need for longer and extended duration energy storage using gravity and even green hydrogen, as we announced with Pacific Gas and Electric. To do this, we have developed our software platform with our EV solutions team that overlays and manages all of these storage technologies, as well as the coexistence and generation systems, even hybrid storage configurations. With that strategic frame on those solutions, I can share that we are executing the customer expectations across all of our projects and on schedule for the 1.6 gigawatt hour of battery and green hydrogen projects from the likes of PG&E and Nevada Energy, some of the largest public utilities in the United States, as well as some of the world's largest independent power players, such as Jupiter Power and Wellhead. We anticipate Wellhead in particular in California will be delivered in Q3, with Jupiter and Nevada Energy to follow before the end of the year. Since all of these projects are running in parallel, during Q1 we had expected investments in project working capital to support the projects at this phase of construction. At project completion, we continue to forecast each project delivering profitability, positive unit economics, and a net positive cash flow as we manage the execution into the critical turnover phases. As part of our execution on these growth projects and enhancing our availability to cash, let me also mention a new global relationship with Marsh that we had referred to briefly in our earnings last quarter. As some of you might know, Marsh is one of the world's leading insurance brokers and risk advisors, and they are supporting us with significant capital project surety and bonding capacity, which is required for many of the projects that we execute. This also includes, very importantly, requirements for letters of credit. but as opposed to tying up cash on a fully non-collateralized cash basis, allowing us to convert also the remaining restricted cash balances from letters of credit to unrestricted cash. We continue to evaluate other efficient and non-dilutive ways to further strengthen and enhance our balance sheet as we execute on a combination of owned and EPC projects that eventually get turned over to the customer. Let's now move on to an update regarding the previously announced Q1 contract with Pacific Gas and Electric to address a special micro-good use case for multi-day storage addressing PSPS events or public safety power shutdowns. This has gotten quite a lot of press in the last two weeks as the project received formal California Public Utility Commission approval. The project is structured as a long-term tolling agreement with PG&E over 10 and a half years. The CPUC recently approved just in the last few weeks, as I just mentioned, for the hybrid battery energy storage and green hydrogen fuel cell system that will provide power in the event of a public safety power shutoff. We are developing the 8.5 megawatt, 293 megawatt hour microgrid with planned expansion to up to 700 megawatt hour thus providing up to 96 hours or four days of energy storage capabilities to the city of Calistoga. Along with our customers, we believe that this project will provide a template for renewable community-scale microgrids in the future and reflects execution to our energy solution-focused customer mindset as a company. Moving on, there has been a lot of focus the last few months on the new IRA legislation and the potential impact to our industry in energy. I want to share with you for the first time a very strategic investment that we have made that also involves the IRA that we actually executed in a first tranche in Q4, but chose not to be named in the original announcement. We are pleased today to announce that we have executed on a strategic investment in Core Power, a US manufacturer of battery cells and modules to build supply continuity on a prioritized basis for the domestic U.S. content for Energy Vault's U.S. customers, supporting our short-duration battery and even hybrid energy storage solutions on a preferred economic basis. In Q4 of 2022, Energy Vault participated in the initial tranche, as I just mentioned, as an undisclosed investor alongside Siemens Financial Services, Quanta Services, Honeywell Ventures, and a set of others. In Q1, this past quarter of 2023, we made the second and final part of the investment. The coreplex, as it's called, will be built in Arizona and be among the first U.S. battery gigafactories built independently of an automotive OEM. In parallel with our investment, we also established a comprehensive battery supply agreement This investment and supply agreement will significantly benefit our domestic customers with their IRA project eligibility. This investment will maximize our supply chain flexibility in serving our local U.S. customers while ensuring continuity of domestic content supply and attractive economics, further amplified by the current IRA legislation. Complementing the announcement above, I am also very happy to share another new announcement and an important announcement about deepening an existing US customer relationship with Jupiter Power. As all of you are aware, we announced our first project with Jupiter for a total of 220 megawatt hour in the states of California and Texas in 2022. That project is under deployment and is scheduled to be turned over in the second half of this year. We are expanding today the previously announced Jupiter Power Partnership to supply domestic U.S. content of battery modules from the original announcement of 2.4 gigawatt hour to 10 gigawatt hour, further strengthening the relationship with Jupiter to ensure supply chain priority on a forward two- to five-year planning horizon of project development while maximizing shared financial benefits from the current IRA legislation. This is so important for our customers as they're doing their planning windows and project development over the next three to five years. And in fact, from talking to many of our investors that are investing in these projects, as well as these same customers, their number one risk they're solving for is in the supply chain. And that means not only having local supply independent of other countries, but also having it at the right cost points. and an ability for them to be competitive. And we feel very, very good that this investment now positions us to be one of the best partners in the United States of these same project developers and even public utilities. I'm real excited to continue to partner with Andy Bowman, the CEO of Jupiter and his team. Jupiter is one of the top U.S. independent power providers, which was acquired late last year by BlackRock's Alternative Groups. We look forward to turning over our first two Jupiter projects this year while continuing to build upon our future relationship with Jupiter and projects to come. I now want to tie together all three of the investments. I know it's been a lot to digest here over the last 10 minutes. Those are the Snyder Texas gravity system, the Pacific gas and electric hybrid system, and this investment in core power. These are very important and very smart, intelligent, strategic uses of our capital to not only address our customer needs today, but to position ourselves very well over the next two, three, four, and five years with our customers and with ongoing conversion of our large funnel into bookings. These investments are all aligned with our unique strategy that I described earlier, and they all involve extracting very attractive financial benefits from the IRA, which can yield higher returns for our customers and higher operating margins for our portfolio of solutions. Because of this, both our customers and our shareholders will enjoy the upside from better pricing, margins, and cash flows. We will continue to pursue other strategic investments that provide such highly attractive returns. Let me now transition a bit and focus on what is fueling our growth, and that is the focus and tenacity of our commercial operations team continuing to drive our funnel of opportunities that we expect to convert to bookings and attractive margin revenue. Regarding the bookings going forward, our near-term funnel grew by 42% to almost 37 gigawatt hour, as mentioned above. As part of that, Our submitted proposals grew by 37%, quarter over quarter, to almost 28 gigawatt hour. Moving through the funnel, our short listings grew by 35% to 2.7 gigawatt hour, and our awards grew by 78% to 6.4 gigawatt hour. We remain confident in our ability to convert these opportunities into bookings, as we did successfully in 2022, on our project awards. To sum it all up, we are playing in an attractive, large, and growing market, one where there has been more energy storage deployed in the past few years than in the preceding decade. We are at an inflection point of growth and therefore of opportunity. We also believe we are exceptionally well positioned to grow faster and more profitably than the market. as these most recent developments demonstrate. That belief is based on our unique multi-storage technology, as well as very smart deployments of our capital for strategic investments. Personally, I have never been more excited about where we are today in positioning ourselves to capture this future. With that, I'll turn the call over now to Yoncase to discuss our financial results in detail. Yoncase?

Thanks, Rob. Good afternoon, everybody. For the first quarter of 2023, revenue was $11.4 million, in line with our expectations and primarily reflecting revenue earned from the progress in execution of our battery storage projects. As we noted last quarter, we expect a significant step up in revenue going into the second half of this year as our revenue cadence tracks the project deployment schedule. We expect to realize about 15% of our annual revenue guidance of the second quarter, growing to nearly 30% in the third quarter, and a further 50% in the final quarter of the year. We recognize gross profit of 2.4 million, or a gross margin of 21.2%, driven by our ability to earn better than expected margins on battery storage projects during the quarter. Operating loss for the first quarter of 2023 was 32.9 million, compared to prior quarter operating loss of 25.7 million, driven by decrease in licensing revenue from Q4. First quarter 2023 adjusted EBITDA was negative 19 million, Our earnings release includes a reconciliation from net loss to adjusted EBITDA. The key non-cash item that we added back was 13.7 million of stock-based compensation. The key non-cash item that we deducted was 1.9 million in interest income net. As of March 31st, 2023, we had 197 million in cash cash equivalents and restricted cash, leaving us well positioned to continue to progress towards our growth objectives throughout 2023 and beyond. The main use of cash in the quarter related to equipment purchases for our battery storage projects, which will translate into revenue, positive gross margin, and cash in future quarters. Lastly, I want to reiterate our full year 2023 revenue guidance within the 325 to 425 million range, supported by our contracted backlog. We also reiterate our margin target of 10 to 15 percent, supported by our offering mix of energy storage projects and IP licensing agreements. We will continue to complement this with various consulting and construction services based on customer needs and demands. We continue to forecast adjusted EBITDA of negative 70 to negative 50 million as we maintain a disciplined approach to our operating expenses and execute on additional licensing and royalty agreements. With that, I will now turn the call back over to Rob.

Great. Thanks, John Case. Before getting to questions, I want to thank the employees and the team here at Energy Vault for your continued dedication and customer focus, the results of which we've just talked through, especially in the type of volatile markets that we live in today. I also want to thank our investors and our broader energy ecosystem partners that share and support our mission of decarbonization. I'm happy that we continue to make significant progress on the development of our groundbreaking and innovative energy storage solutions that are solving complex customer problems as they make their own clean energy transition. This is the Energy Vault way and underscores our purpose in existing as a company. With that, operator, we are now ready for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. The company kindly asks you that you limit yourself on the one question and one follow-up. One moment, please, while we pull for questions. Our first question comes from Joseph Osha with Guggenheim. Please go ahead.

Hello. This is actually Hillary on for Joe. And I first wanted to touch on the pipeline there. You had a pretty big uptick in both the submitted proposals and shortlisted projects. I'm just wondering if you could share any additional color on what the composition of that looks like as well as conversion rates and timelines for when we'll see that become awarded business.

Sure. Thanks, Hilary, and good to hear again. First of all, what I'd say about across those categories of the funnel, the submitted proposals, the shortlistings, and our new awards, There is no one dominant technology or duration. So what I can tell you is that generally we continue to see the strength, in particular in the European and the U.S. markets around the shorter duration opportunities. We continue to see demand, and I'd say earlier than the rest of the long-duration market, for our gravity systems. So I do want to highlight that, that we announced a two gigawatt hour of gravity systems under EVX. And then generally, we continue to see a lot of interest from our customers following on the Pacific Gas and Electric announcement. They're looking to solve unique needs that involve, in some cases, backup system, microgrids, the use of new technologies to help meet those needs in ways where they do not have to rely on diesel generators or natural gas and really working to look at bringing renewable solutions to the table. So I would say generally, to the first part of your question, to characterize it, we're seeing activity across various parts of our portfolio and solutions. The second thing I'd address in your question, which is timing of flow through, you know, that depends project to project as we continue to see. So as we looked at last year, we were able to convert on a lot of the larger opportunities that we're now executing this year. We see no reason why we're not going to continue to do that this year. And in terms of timeframes, these projects I would categorize in terms of timing to think about in, I'll start with our existing customers. So we have some projects that are follow-ons with, for example, existing customers, and those can move pretty quickly through our funnel because they're already – you know, set up with a legal basis, contracting, our teams know each other. So those can move in 90 days. And so we would expect to see some of those things move more quickly. Other new customers where we're beginning to establish those relationships or there's additional timelines or permitting involved, those will move on a three to six month basis. And there's a big chunk of projects there The third thing influencing timing has to do with some of the requirements on the customer end to close things like permitting or close on other final approvals where they have chosen in some cases to lock us in, meaning to actually issue an award to us, so where we've been chosen. And then there's the contracting timeframe that may be influenced by any additional approvals required on their end. We have some customers that are happy to move into an actual booked contract while there's still some final approvals required that are more procedural. I think PG&E is a good example of that where we announced and did a contract with them and then moved to an expected Public Utility Commission approval, which just happened a few weeks ago, and that was in line with their timeframe. So to use as an example, they had set May 15th as their date for when they expected that approval, and in fact, it came a few weeks before that. So all of those things will influence that flow through the funnel. I guess the last thing I'd say about that is we do have some strategic investors that obviously know us very well. They're investors in the company, and typically those types of solutions and discussions can also move potentially on a faster basis. So I would say to range it, I'd say anywhere from 90 days to up to nine months plus, just pending timing on some of the longer duration and strategic large projects in particular.

Great. Thanks for all the detail. Second question, just on the gross margin profile of the business, just wondering if you can provide a little more detail as we look beyond this year. kind of between the cost structure as well as the revenue mix there and kind of what the different puts and takes are and how we might expect to see that margin ramp.

Sure. Well, since you asked about next year, one of the things we announced today is the investment in core power. So as we look at the market over the next three to five planning horizon, and we do that as informed by our customers. So we do a lot of planning with our customers. But some of the things we announced today have to do with enhancement of that margin structure. As you know, our range this year is 10% to 15%. And as we reaffirmed, we expect to be within that range. We obviously had a slightly better performance of over 20% on pure battery project execution revenue this quarter. But we still maintain that range of 10% to 15% for this year. Everything we're building and doing as we volume and scale as a company should have an enhancing effect on our margins. So we're going to be demonstrating the first gravity system, of course, this year. As we look at building those out, we're going to be building them out in a way that will increase volumes across the supply chain, and we're going to expect benefits there in our margin structure to evolve on the gravity systems. As well, the actions we're taking and the types of agreements we're signing with our partners now in looking at even the short-duration market are all focused on, I would say, not only margin, but in particular supply chain continuity. It's interesting, as I mentioned with the Jupiter discussion, a lot of the focus and risk from investors that own independent power providers or even generally in strategic companies that are deploying energy storage, large industrial companies, they're very focused on ensuring that they're actually going to have access to the supply to meet their commitments. And given what we're seeing in the geopolitical arena, you can understand why that's the case, and which actually led the U.S. to be, I think, ahead of the pack here with the new IRA legislation, which encourages that local domestic content. So this aspect of energy independence is driving – this focus on supply chain continuity, and we're out in front of that. And net-net, that will be a decision factor for our customers, and hence, given how we're positioning ourselves, I expect that to have a margin-enhancing benefit for us as a company as well in the going-forward years that you were asking about, so in the next three- to five-year planning window.

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

Next question comes from Chris Ellinghaus with Seabirds William Shanks. Please go ahead.

Hey, everybody. How are you?

Hey, Chris. How are you doing?

Good. I'm sorry, Robert. I think I missed this. I think you were making some comments about the Texas project, and I didn't hear what you said. Could you just repeat that?

Oh, you mean during the prepared remarks or from the last question?

Yeah, no, the prepared remarks.

Okay. Yeah, I just mentioned the Enel project, which is in Snyder, Texas, and that's the second gravity VX system that's being built. They've progressed things through pilings and civils and into the foundations now that they're getting into in this phase, and I think we've shared a few pictures of that as well. So that is a tolling agreement, so we're building that project out, and... We're expecting that project to be fully online in the second half of 2024. Okay, great.

Thank you. Do you have any color that you can provide on why margins might have been a little more than you had expected?

Yeah, I'd say two things. One is we executed well in terms of maintaining our schedules and maintaining you know, the relationships on the supplier base and with the local customers to ensure that, you know, that we don't trigger any issues schedule-wise or any additional problems in the field that would need to be managed that would increase costs. So I'd say one aspect is better execution, I'd say, ahead of plan in terms of how we're managing projects and any associated contingencies with them. And, you know, the second piece is you're seeing now for the first time some pure you know, battery revenue that doesn't have any IP licenses, for example, in the gross margin line. We do recognize some of the ongoing IP licenses, but down into other income. So we've been, you know, pretty clear, Chris, about our positive unit economics. I know there was a lot of questions earlier as we started to announce battery projects given other companies that have had negative gross margins, for example, in that space. You know, we've always highlighted how we've not only contracted the projects, but also the fact that we didn't win these first projects by buying them. We didn't underprice them. We won them because of differentiation we provided that other companies couldn't. And at the end of the day, that has to be reflected in margins. That's it. So I think the market, and as you'll see quarter to quarter, we will remain focused on that execution. Obviously, things can happen in the field. We're very focused on ensuring that we meet the customer expectations in that regard. And while dates might move because of things on their end, meaning permitting or other customer-driven changes, as I mentioned and reiterated, we are on track on all of our projects to the customer expectation. Now, whether that date moves a month or two because of things on their end, You know, those things happen any time you're building things out in an EPC model. But as I stated in our update, we feel good about our current execution and our managing the project so that we can, you know, stay within the ranges we've set. And in this case, in this quarter, we did above our range of 10% to 15%. Does that make sense?

Yeah, it makes sense. Can you give us any more color on the core power investment? What are they saying their expectations for domestic production look like today?

Well, I think from their own public announcements, they're projecting to be in actually producing their fully integrated production cells here in the next 12 to 24 months. So they're going to speak to that and give those updates. But they're already a U.S. company. So to be clear, CORE didn't get just newly formed because of the IRA legislation. So they are a U.S. company. They've been here. They make lithium batteries today. and they're going to be expanding that operation in a very, very large way, as you could get a sense of from some of the things that we just announced. So we took that action in looking at the market, Chris, not only just to participate as a customer, meaning like many of our companies in our space, now that domestic production should become a reality of lithium-ion in the U.S., Many companies will be advantaged in terms of having that local content. However, we chose to actually participate in it and therefore get some advantages around both supply continuity as well as preferred economics by becoming an investor with one of the early adopters. And so that's what's behind it and why we're excited to make that move. And I think you heard the announcement with Jupiter on the expansion. by a factor of four, three to four, on the scope of domestic battery content for one of the largest independent power players in the United States.

The Gravity Awards are particularly interesting. Can you give us any more flavor for types of customers or timing or locations, any of those sorts of things?

Right now we are going to be providing, the only guidance is providing the regional, some regional pieces of that. So it is a, they are projects that are outside of the United States and they are projects that we're going to be expecting to now as we are already working on the contracts to convert those into bookings. So most of the things you're going to hear from us in terms of new bookings announcements, there may be some revenue that gets into this fourth quarter, but most of it will be for the years going forward in terms of revenue recognition that we will be executing in 2025 and even into 2026, given the size of these deals. And that obviously puts us in a very strong position and makes us feel very good that we're not only executing this year on things we've already contracted that gives us very good visibility, but now a lot of the awards and the bookings we're going to be hearing will be about building out that future growth of the business over the coming two to three years.

Great. Thanks for the call. I appreciate it, Robert. Thanks, Chris.

Next question comes from Brian Dobson with Chardon. Please go ahead.

Hi, it's Greg Pendian for Brian Dobson. Just one quick one, and I guess dovetailing on that last question. You mentioned that the two gigawatts um are outside of the u.s on the gravity system is there anything unique about having a system in texas that would showcase it more towards domestic clients or do you think that you know it's fair to say that china will still at least showcase the technology uh when that's completed in 2q

Sure. So what I'd say is for sure China will be the first system up and operating at that scale. So they were well ahead of the pack, and so they will be the first system. But also to be clear, the United States market is also an important market for our gravity systems. That's why we worked and collaborated with Enel, the largest global IPP, on having that system in Texas. So The United States remains very important, the largest market for energy storage in any event. Interestingly, it's primarily short duration today, but we'll be continuing to evolve to longer duration from the, let's say, the two to four hour. We're going to begin to see four to six, I think, here in the coming 12, 24, 36 months. But that doesn't minimize the opportunities for gravity, and we're looking at capturing those, in particular with the IRA legislation that's focused on domestic content, right? So we have that today in gravity. We don't have to go build gigafactories. We have it today, so we can capture that. And I think China will play an important role in demonstrating not only operating the technology, but something very important around our round-trip efficiency and the efficiency of that we can achieve with that system. I know we're talking about those two markets, but Europe, Australia, those will also be good markets for our gravity solution as long duration becomes more of a need in the market in the coming years.

That's very helpful. Thanks.

Thank you.

The next question comes from Thomas with TD Cohen. Please go ahead.

Thanks for taking my questions. And apologies if any of these were covered in the prepared remarks. First, I just wanted to dig in a bit more about awards where you're winning with solutions that incorporate green hydrogen, given the early success there. Are there specific pockets of demand that you see, maybe on a geographic basis, or certain customers that you think would be dispositioned to that type of an approach?

Yeah. So I would say microgrids in the U.S. generally, which is essentially... What we're building in Calistoga, although that will be grid connected as well, but just we'll have a special microgrid focus on the city of Calistoga. So I would say generally that use case takes different forms, but the general use case of the microgrid is very relevant to the United States, especially regionally in certain areas that are solving for potentials for planned shutdowns and even unplanned shutdowns. Okay, that's a primary use case. and in emerging markets where a grid doesn't exist, for example, where you have to build out microgrids. So I would say it's gonna be something that will be targeted at certain applications and in certain locations where there's a need, for example, for multi-day storage. The reality is there's really not any long-duration technology out in the market that's proven at scale today. So our gravity is going to be one of the first ones that's not pumped hydro at a large scale. If you add in what we're doing with this multi-day storage that's unique because it also has a hybrid component of lithium ion batteries to it to meet black start and grid forming capabilities. So if you look at that and go to multi-day, and we're going to have that up scheduled for mid-next year, we're going to have some of the first longer duration solutions in out in the market operating at this type of scale as well in the world. And as the longer duration market heats up, we're going to be therefore in a very good position to meet those needs. But I think that these hybrid type of solutions where customers have some unique needs is where we do see the potential use of green hydrogen as what we call an ultra-long duration or a multi-day type of of storage medium that today really has no corollary in the market.

I appreciate the color there. Maybe as my follow-up, I think you had previously identified one gigawatt hour of projects where you're going to be operating as the system integrator with the battery hardware procurement being undertaken by the customer. You know, how have you been seeing traction with this approach, and do you have maybe an update on a gigawatt hour basis just for integrator work relative to where your backlog now is?

Sure. Yeah, that gigawatt hour represents those first three projects that are in deployment, and exactly to what you said, those are under what's called a build commission transfer model. It doesn't stop there. So we are doing additional management post-turnover. So including long-term service agreements, maintenance. In one of the cases, we'll also be doing some asset management. So those will have longer tail revenue and margin streams for us outside of those. But that model, to your question of what else are we seeing with those, that is pretty much the standard model we do for the shorter duration solutions where you have either public utilities that can have a base rate asset or independent power players that are investing in those solutions and providing them over long-term agreements, for example, to utilities themselves. So in both of those cases, they want to own those solutions. And it's not our business model to compete with our customers in any event. We do have some customers. We mentioned an L Green Power gravity system and the hybrid system for Pacific Gas and Electric where we will be owning those systems. and, in fact, be signing long-term tolling agreements with those. Now, we don't have to own those forever. You know, I would say there's, you know, other type of funds, you know, pension funds or other type of groups that like to own these long-term sort of fixed and nice predictable cash streams and cash flows. So that's not necessarily our long-term model. So, you know, I wouldn't rule out, for example, us, you know, potentially selling those projects, pooling in that cash. But we, in all cases, will continue to do the asset management, assuming it fits that buyer's model. And that's another, you know, interesting part of our evolving business model that's also margin accretive.

Excellent. Very helpful. I'll jump back in the queue. Thank you.

Next question comes from Noel Parks with two Ohi brothers. Please go ahead.

Hi, good afternoon. I had a couple of questions. You talked a bit about sort of geographic reach of the gravity product. You mentioned particular Europe and Australia will also be good markets for long duration. In the past, I know you've talked about the uh the first installation in china attracting a lot of domestic attention there i just wondered if you um uh just had any updated thoughts on nature of that interest um when you think it might materialize or or just you know an inflection point ahead sure there's been some announcements there uh locally in china that involve our partners

with multi-gigawatt-hour gravity storage projects using, obviously, our technology there. And so those are announcements we have shared or put out through our socials. We typically don't make follow-on public announcements of that, but there is absolutely a lot of interest there locally. And even from, by the way, other customers that we have across the world that want to go visit the site, and some already have, So what I'd say is what I was very happy to see is before we're even operating this system, there's been follow-on announcements of between two to four gigawatt hours and broad initiatives. One of them in particular is called the Zero Carbon Park Initiative. And some of those things are being done in partnership with some of the largest players in China, like Three Gorges Power, which is the largest pumped hydroelectric plant asset management and engineering company in the world. So that's all encouraging to see, and that's going to drive royalty. Those will all drive royalty streams. We've been public that that's a 5% off-the-top project royalty stream for us.

Great. Thanks. And I was wondering, just on the software and technology side, with everything that's being coordinated through EVS. Are there any particular milestones ahead for system enhancements or other things that help add to the selling proposition or our response to customer feedback you've been having over this past year or two?

Sure. I'd say two primary things. First of all, and let's just talk about what's happening this year for the first time, we're going to be turning over our first battery systems this year and with that new software system. So I'd say one of the first milestones is the fact that we are going to be turning over on time and commissioning these systems. So those will be the first milestones, and there's three of them this year because we have three projects we're going to be turning over. Secondly, we were chosen as well for what we call our energy management system, which is The system that, in addition to running the core operations and management of the battery storage system itself, there's other higher-end capabilities in a software platform, what we call our EMS, our energy management system, that is not only managing the storage, but can also manage the existence of other generation technologies. So that can be wind, solar, and even fossil storage. but also manage other energy storage technologies. So those functionalities, which we were selected, for example, by a large Western utility for our energy management system over the last three to four months, those milestones that you're going to see are providing other functions that are a higher level that get into things like the economic dispatching of for example, and charging of the system. So in addition to managing the battery system itself, some of those milestones we're going to see post these first turnovers and will be the result of, therefore, higher value-added systems, which will generate a higher software content and a higher portion of the deals, which will enhance our margin capability. And those milestones are going to be coming later in the year and into 2024.

Terrific. Thanks a lot.

There are no further questions at this time. I would like to turn the floor back over to the CEO, Robert Coney, for closing comments.

Great. Thank you. And I want to thank everyone for the questions. Thank all of you for joining the call. Here are investors. I know our employees. join this, and partners and others out there. We feel really good about our progress and just close to saying that, as you've come to expect from us, we've made some new announcements here and things that are all focused on, number one, our customers and executing well for them. Two, putting together and enhancing our portfolio to provide more value-adding solutions to them. In the end, driving the long-term shareholder value of this company. Thank you very much.

This concludes the conference today. You may disconnect your line at this time. Thank you for your participation and have a great day.