BARK Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Fluence Energy Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President of Investor Relations. Please go

Speaker 1

ahead. Thank you. Good morning, and welcome to Fluence Energy's 2nd quarter 2023 earnings conference call. A copy of our earnings presentation, Press release and supplementary metric sheets covering financial results along with supporting statements and schedules, including reconciliations and disclosures Regarding non GAAP financial measures are posted on the Investor Relations section of our website at fluentenergy.com. Joining me on this morning's call are Julian Nobreda, our President and Chief Executive Officer Manu Sial, our Chief Financial Officer and Rebecca Bull, our Chief Products Officer.

Speaker 1

During the course of this call, Fluent's management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings For our forward looking statements and for more information regarding certain risks and uncertainties that could impact our future results, You are cautioned to not place undue reliance on these forward looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward looking statements for new information.

Speaker 1

This call will also reference non GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non GAAP measures to the most comparable GAAP measure is available on our earnings materials on the Company's Investor Relations website. Following our prepared comments, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much.

Speaker 1

I'll now turn the call over to Julian.

Speaker 2

Thank you, Lex. I would like to send a warm welcome to our investors, analysts and employees who are participating in today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the Q2 as well as our outlook for the rest of the fiscal year. Starting on Slide 4 with the key highlights.

Speaker 2

I'm pleased to report that in the quarter, we recognized a record $698,000,000 of revenue And $32,000,000 of adjusted gross profit. Our demand was strong across all three of our business lines, Our new orders were approximately $847,000,000 highlighted by our services business contracted 1 gigawatt And our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog As of March 31 was $2,800,000,000 a quarter over quarter increase of approximately 100,000,000 Even after recognizing almost $700,000,000 of revenues during the quarter. I will also note that approximately 81% of our backlog with non related parties. Lastly, our recurring revenue businesses, which consist of services and digital, Experienced a strong growth during the quarter.

Speaker 2

Our service attachment rate was 2 63% for the 2nd quarter, Driven by the signing of the service agreement with Orsted. Furthermore, our deployed service attachment rate, which is based on our cumulative Active service contracts relative to our deployed storage remains above 90%. Looking specifically At our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts, which is 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management.

Speaker 2

We still have a lot of work to do regarding our digital business, But we are very encouraged by the results thus far. Turning to Slide 5, I'd like to discuss the 5 strategic objectives that we highlighted previously I'll provide you with an update on our progress. 1st, on delivering profitable growth. I'm pleased to report that we are raising our fiscal year 'twenty three guidance for both revenue and adjusted gross profit. As Manu will discuss in more detail, we are able to raise our guidance due to better execution Casting some of our projects being ahead of our expected schedule.

Speaker 2

Additionally, I'm pleased to report that we're pulling forward our profitability timeline. As you may recall, we previously expected to be adjusted EBITDA In fiscal year 2024, we do not provide quarterly guidance. However, we are expecting to be close to adjusted EBITDA breakeven in the Q4 of 2nd, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we received a 200 Megawatt binding award for our Ulfast Truck product, Making this our 3rd award of energy storage and transmission. As I noted on our previous calls, we are very bullish on the transmission segment And expect this area to grow as transmission congestion becomes a critical issue around the world.

Speaker 2

Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem, As we're one of the we're one of only a handful of companies in the world that possess the technology experience and performance requirements Necessary to use any storage as a transmission asset. 3rd, we will convert our supply chains into a competitive advantage. I'm pleased to say that we have signed a master supply agreement with ASC under which we will procure battery cells. This partnership adds another high quality battery supplier to Fluent's portfolio, enhancing our ability to meet The growing demand for any storage solutions. This agreement supports our domestic module manufacturing efforts and strengthens our position as a leader in the energy storage industry.

Speaker 2

4th, we will use Fluent Digital As a competitive differentiator and a margin driver, looking out at our NISPERA product, starting this month, We will begin including Naspers in our standard hardware solutions offerings. This is an important step as it will provide us with a path To increase in our IRR as we bundle our offerings and execute on our 1 sales channel approach we discussed last December. And finally, our 5th objective is to work better. I'm proud to state Fluent has published its inaugural sustainability report on our website. In this report, we outline our Commitment to a circular economy that includes sustainable end of life management for our products as well as our firm stands Against forced labor.

Speaker 2

To publish a sustainability report this quickly after becoming a public company is a true testament To our values and mission to transform the way we power our world for a more sustainable future and demonstrate our leadership within the sector. Turning to Slide 6. Demand for any storage continues to accelerate. In fact, our pipeline now sits at $11,200,000,000 which is up from $10,300,000,000 last quarter. We expect we will start to see some projects award in the second half of this calendar year that are directly attributable to the Inflation Reduction Act.

Speaker 2

We reaffirm consolidated revenue growth of 35% to 40% year over year for fiscal year 2024, irrespective of the issuance of the final IRA guidance. Our 2023 guidance increase And the incrementally higher 2024 outlook represents an expected benefit to revenues of nearly $500,000,000 over this 2 year period. Relative to our expectations on our Q1 earnings call conference 3 months ago, It is worth noting that we're seeing and having success regardless of the IRA. A few examples of recent successes include The binding award in the Permissions segment that I previously mentioned. 2, we were recently awarded a 400 Megawatt hour contract Australia for Shell's Energy Rangeback Project.

Speaker 2

And as you may recall, we signed a 1200 Megawatt hour contract with in December. And during Q2, we signed a service agreement for this project. All of these were achieved without consideration of the Inflation Reduction Act. Turning to Slide 7. We are pleased to see that some of the initial IRA regulation has been released by the U.

Speaker 2

S. Treasury. However, we are still waiting on the domestic content regulations, but we believe the actions we are taking will enable us to meet the domestic Content requirements sought by our customers. In regard to our U. S.

Speaker 2

Model manufacturing, we are on schedule and expect production to Starting our Utah facility in the summer of 2024. As it relates to Section 45X of the IRA Or the production tax credit, we are targeting to be able to record the $10 per kilowatt hour incentive associated with manufacturing U. S. Battery modules. Right now, we do not expect that we will capture incremental margin As a result of manufacturing our own modules in the U.

Speaker 2

S. We do believe it will be a volume driver for us As many of our U. S. Customers have expressed the need for a U. S.-made product, thus we expect that $10 incentive will go towards offsetting the cost of reaching economies of scale.

Speaker 2

From an accounting standpoint, our current expectation Is that we will account for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and service. However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the 1st 5 years of the credit. The exact timing of the cash payment is unclear at this time as we are still waiting for the clarification from the U. S.

Speaker 2

Treasury. Currently, we're eagerly waiting for the publication of the IRA guidelines for any storage and domestic content. As several of our customers want the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, our 2024 growth expectations remain unchanged irrespective of the final regulations being published.

Speaker 2

Turning to Slide 8. As I briefly mentioned, We recently published our inaugural sustainability report, which highlights our vision to implement digital solutions To further optimize the energy storage supply change and life cycle, I'm pleased to state that we're committed to promoting social sustainability By fostering diversity and inclusion within the organization, we believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year 2023, which includes that approximately 1 third of our employees hired have identified themselves as female. In the report, you will also see that end of line management is very important to us and we have committed to developing a circular economy framework for our products.

Speaker 2

Additionally, we highlight in the report that we have established our robust supplier code of conduct that is aligned with the international bill of human rights at work That ensures that our suppliers are here to ethical and sustainable business practices. We summarize our policy on conflict minerals and ethical sourcing, in which we commit to working towards avoiding the use of minerals Within our supply chains from conflict affected areas. Furthermore, in the report is a signed commitment letter Taking a 0 tolerance stance regarding the forced labor. This is an area that is critical to our values. We also included a road map and time line, so our stakeholders can monitor our ESG journey.

Speaker 2

In the spirit of accountability to transparency, We will provide an update on our sustainability program annually, so our stakeholders can track our year over year progress. Overall, Fluent's Energy Sustainability Report demonstrates the company's commitment to sustainable practices And its efforts to drive positive environmental and social impact. Through its various initiatives and targets, Fluent Energy is working towards A more sustainable future for all. In conclusion, I'm very pleased with the achievements of the 2nd quarter. Although we're mindful, there's still a lot of work to be done, we will look to continue this momentum as we progress through the end the remainder of the year.

Speaker 2

I will now turn the call over to Manu.

Speaker 3

Thank you, Julian. I will begin by reviewing our financial performance Our 2nd quarter revenue reached a record high of $698,000,000 with a record adjusted gross profit of $32,000,000 Revenues benefited from a pull forward of more than $200,000,000 into the second quarter from the second half of this year, Driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the Q2, more than 85 percent of our revenue or roughly $600,000,000 came from legacy contracts. The revenue that we pulled forward into the Q2 was associated with legacy contracts and we now anticipate That almost all of our low margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half.

Speaker 3

With regard to operating expense and adjusted EBITDA, 2nd quarter operating expense, excluding stock compensation, was $61,000,000 or approximately 9% of revenue, which is down from approximately 17% of revenue in the Q1. We remain disciplined about holding our operating expense growth To less than 50% of revenue growth and expect this model to create operating leverage in 2023 beyond. Turning to our cash balance. We ended the quarter with more than $380,000,000 of total cash, including short term investments and restricted cash. This figure is in line with our comments on our Q1 earnings call.

Speaker 3

Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300,000,000 In the Q2 'twenty three from the Q1 'twenty three level, our decision to focus on battery supply chain assurance and risk management Enhance our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment And as communicated in our last earnings call, we should expect improvement in inventory turns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity To meet our cash needs for the next 12 months, please turn to Slide 11. As Julian indicated, We have increased our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit and narrow the ranges. We now expect our total revenue to be between $1,850,000,000 $2,000,000,000 which is up from our previous revenue guidance of $1,600,000,000 to $1,800,000,000 This is an increase of $225,000,000 based on the guidance midpoint, Driven by our overall project timeline acceleration, while we expect that most of our projects will be executed Within the 15 to 18 month timeframe that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024.

Speaker 3

This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects. We are also coming into the 3rd quarter with 100 percent of our second half twenty twenty three expected revenue in our backlog. Turning to our 2024 revenue outlook, we continue to expect 35% to 40% growth in revenue from 2023 to 2024. Notwithstanding the higher revenue base we now see for 2023. This implies an incremental $300,000,000 of revenue for 2024 relative to our previous outlook.

Speaker 3

Thus, for the 2 year period 2023 2024, We now see revenues of more than $500,000,000 higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110,000,000 $135,000,000 which is up from our previous guidance of $85,000,000 to $115,000,000 It is important to note That this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint. Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the Q4. With that, I will turn the call back over to Julian.

Speaker 2

Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluent's history. 2nd, we continue to make significant progress on our risk management, most notably in reducing our supply chain risk Concentrate on efforts in developing new products and solutions that create value for our customers, as shown in our 3rd transmission segment award. 4th, we are positioning Fluent for increased IRR by including Nispera in our standard offer starting this month.

Speaker 2

And 5th, the financial results and accomplishments covered in today's call provide us with high confidence to increase our total revenue And adjusted gross profit guidance for fiscal year 'twenty three and to pull forward our time line to profitability. This concludes my prepared remarks. Operator, we're now ready to take

Operator

Our first question comes from the line of James West with Evercore.

Speaker 2

Good morning, James.

Speaker 3

Hey, James.

Speaker 2

How are you?

Speaker 4

Hey, good morning, guys. Julian, quick question for me about your customer base and kind of how they're thinking about their Storage needs right now. I know as we think about last year, it was kind of a mad dash scramble for For assets and for getting equipment and batteries in place, we've obviously had the IRA and there's been some Time line lag on total understanding what the IRA means in the U. S. But Are the customers, are they coming to you now still with, okay, what's it going to cost me?

Speaker 4

Or is it more of a question of When can you get to me? What's the timeline? Because we know you're not just focused Land and expand, but you focus on profitability too, which is clear this quarter. And so congratulations again on this quarter.

Speaker 2

Thanks, James. I mean, we do a lot of our ability to expand our margins have come The main driver has been a real detailed segmentation of the customers we work with. So It might be a long way to answer your question. But so what do we do? We look for customers that value what we offer.

Speaker 2

No. That value clearly products that are that we got that they are sure that we're going to be delivered, that they're going to perform as we tell them that they're going to perform That will provide services that will keep these solutions up to date and that will have them running for them when they need it. You know that they can insure it very well and that they can finance. So the customers who care about that are the customers we work with. Right.

Speaker 2

Some of them, A, price is very, very more important than others. For some of them, it's ensuring the performance. For some of them, it's Especially where the regulatory systems are going to change, I need somebody who will know will help me adapt my systems. What do we see this quarter, which I guess is a little bit what do we see in the very front end? Clearly, the reduction in lithium prices and the more liquid market for batteries opens up More optionality.

Speaker 2

I think that the RMI that we offer our customers, which when prices were going up was something that make them a little more cost. So now it makes them feel better On signing a contract because they know at the end of the day, they will get something that's in line with what the market is paying or close to what the market is paying. So that's great. So that's globally you see that and that. On the other side, you have in the U.

Speaker 2

S, the Inflation Reduction Act, the delayed. Some of our customers are talking to their off takers and asking their off takers, do you need the products by certain date Or do you want to wait until we know what the where we're going to get this 10% Upside that will convert into better prices for your offtake, for whatever services you're selling. The answers are different. I think that Some customers will need to have the projects online by certain dates or the off takers will need, so those will move forward, we think. Some of them are, yes, this can wait, and that's kind of where this will land.

Speaker 2

So I don't know if that's that's kind of the landscape of where we are today. So we today and the reason why we were able to affirm Our growth for next year, irrespective of the IRA, which was because we have seen very, very strong demand outside of the And that gives you looked at our backlog, what we have signed already, what we have seen outside of the U. S. And we believe that We can meet the 35% to 40% growth irrespective of where the IRA regulations come up.

Speaker 4

Okay. Okay. That's very helpful, Helane. Thanks for that. And then maybe a quick follow-up on me on margins and maybe for Anub, but the You'll get into EBITDA breakeven by the end of this fiscal year, obviously, good target and making good progress there.

Speaker 4

But how should we think about EBITDA margins as we go through fiscal 2024 and getting to a level of profitability, sustainable profitability

Speaker 5

Yes. So

Speaker 3

what consistent with what we have said in our last call, we expect to be EBITDA positive In the fiscal year 2024, I think you'll see the margins progressively improve as we go through the quarters in the fiscal year 2024 as well. And that's because if you look at our trajectory and look at it from a trailing 12 month kind of revenue average, We continue to grow our revenue. And as we've said, we'll grow our operating expense at less than half the revenue growth rate. And if you couple that those two comments with the fact that we are signing new contracts in the 10% to 15% margin rate, you can see the profiling of the EBITDA Progressively going through the quarters.

Speaker 4

Okay, got it. Thanks guys.

Speaker 3

Thanks.

Operator

Our next question comes from the line of Brian Lee with Goldman Sachs.

Speaker 2

Good morning, Brian.

Speaker 6

Hey, everyone. This is Miguel on for Brian. Maybe just the first question here on the $500,000,000 incremental for fiscal 2324, you're talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples? Is it just A function of getting more visibility on batteries, is it being able to pull in projects faster than expected?

Speaker 6

Just Hoping to get a bit more color there on the execution front. Thanks.

Speaker 2

Yes. Brian, the way I will first, clearly, it's a fact that our machine is working better. We had the batteries. Our manufacturing did a great job this quarter, and we were we have been able to derisk Our deliveries in our contract with our customers. So I think the effort of A lot of work from everybody, from our supply chains, from our sales team, from our manufacturing team, but also at the end that we have been able to derisk Our deliveries in a way that allows us to recognize revenue, even if some of our customers Are not fully ready to install the liquid.

Speaker 2

No, that's the way to think about it. And the combination of the 3, I cannot tell you 1 each one is very essential for this. If the supply chain had not worked, we wouldn't be here. If Manufacturers have not been able to pick up products and it wouldn't be here. If we have not the risk and our implementation, if we have not done the work they're doing, We wouldn't be here.

Speaker 2

So is the machine working better? And we have identified the projects that we where we believe we can do this And those are the basis for our $500,000,000 better revenue over the next between this year and next year.

Speaker 6

Got it. I appreciate that. And then the follow-up question here is, kudos on the update to the guidance obviously, but Outside of that, just we're hearing about module constraints in the U. S. In general, still hampering a bit solar projects.

Speaker 6

Could you maybe give an update on what you've seen specifically for projects in your backlog for solar plus storage projects? And maybe to what degree you've Those kinds of projects push out because of these module constraints. Thanks.

Speaker 2

Yes. I mean, I don't understand. We haven't heard anything specific from Our customers, as you know, we sell to customers who are probably on the bigger side and have the ability to manage that better. I will tell you that's clearly one of the reasons we took into consideration when we looked at our risk Enterprise Risk Management and one of the things we changed in our contract was that if our solutions are ready for delivery, We the customer needs to take them irrespective of where they are in their Solar project, if it is connected to a solar project with respect to where they are with some other elements. So that's what I would tell you.

Speaker 2

But we Our customers today, I haven't heard anybody coming up to us and telling us, hey, I'm not going to be more of the questions on being a little bit cautious

Speaker 6

Okay, got it. Thanks everyone. I'll pass it on. Thanks.

Speaker 2

In the U. S, no kidding.

Operator

Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Speaker 2

Hey, Maheep. How are you?

Speaker 5

Hey, good morning. Thanks for taking the questions here. Sorry, Hoping between calls here, so might have missed this. The $500,000,000 over the 2 year period, is that higher revenues versus the prior Run rate or is that just looking at FY 2024 versus FY 2022?

Speaker 3

Yes. Hey, May. So the way to think about $500,000,000 is as We've increased the guidance for 2023 and at the midpoint it's $225,000,000 And then we've kept the same run rate. So you have a higher 2024 implied outlook or outlook based on a higher 2023. So if you Take that math to 2024, that's incremental $300,000,000 for 2024.

Speaker 3

So you add the 225 with the 300, you get to over $500,000,000 of revenue. And that's on the backs of great project execution and that's in the Q2 and that has a read through For the remaining 23 and 24 as well. And I would be remiss if I don't reiterate the fact that we have very strong demand signals With over $1,000,000,000 increase in our pipeline.

Speaker 5

Got it. No, I appreciate that clarification. And then could you kind of talk about which regions are driving that? Is this customers accelerating the projects or more

Speaker 3

Yes. So what I would say in terms of the demand signals and if you look at our order book For the Q2 and as Julian mentioned, we are winning globally. And we are winning both in solutions and in services. So that's kind of Color and context for your question on the top line of the demand signals. Obviously, The Americas is 2 thirds of our overall business and that's going to be the larger dollar driver of it, but we are winning globally.

Speaker 3

In terms of what's driving the revenue upside in the second quarter We typically will see execute our projects within the 15 to 18 months. But because of better execution As well as how we are writing our contracts now, we have the ability to pull forward some select contracts In the lower end of the 15 to 18 month range. And that carries through in the back half of this year and next year as well. Got it. Appreciate it.

Speaker 3

I'll take the rest of that.

Operator

Thank

Speaker 3

you. Thanks, Steve.

Operator

Our next question comes from Tom Curran with Seaport Research Partners.

Speaker 2

Hey, Tom, good morning. Good morning. Good morning.

Speaker 7

For the growth you've had in services Assets under management for fiscal 2023 year to date. Could you share with us, for the contracts you've added, The split between those with augmentation and those without?

Speaker 3

Yes, I don't think we give that split, but the way to think about it is a significant portion of our contracts have the Ability to augment the site if the customer so chooses.

Speaker 2

Gives them an option.

Speaker 3

Gives them an option. So That's the way to think about it. So most of our customers do have the option in their contract if they so choose to augment.

Speaker 2

So years ago or before, it was not an option for customers. They had to take our augmentation proposal. Now The way these service agreements are, they do have an option and they can decide to take or not take Our augmentation proposal. We believe that we're all going to take it, but because we have but that's how it works.

Speaker 7

And so you are seeing evidence to support the expectation of a trend towards evermore augmentation

Speaker 2

Yes. The issue is that as it is an option that the customer can take, we cannot put it as a You know, backlog value, you know what I mean? So it's an option that they have. But I think that when we have looked at this, We believe in most cases, it will it all depends a little bit on where the customer needs are on his side or his contract and his offtake We said if there is a need for augmentation, they will do it with us. And we have worked from a product perspective, We have made some changes to our offering to ensure that we can provide Our augmentation offering is a lot wider.

Speaker 2

So we can offer augmentations with different technologies. So that I think will also make us a lot more competitive when the time comes. And I think it will I don't think anybody will be able to get into that territory, but I don't want to brag about something that hasn't happened yet.

Speaker 7

I appreciate that, Julian. And then for the consolidated pipeline, can you give us a sense of How much visibility you have on the portions of that, that are mega projects or storage as transmission awards, that Could be doled out over the next 12 to 18 months. And then for storages transmission, Would you expect your next award to most likely come from the U. S, Australia, Germany or Chile?

Speaker 2

Yes. I mean, I prefer not to go into the details about our pipeline. I think it's so That will be my preference. Not to go into start giving details of the pipeline will make our life all our life more difficult. On the transmission as a storage as a transmission, we're working Both in Europe, in Chile and the U.

Speaker 2

S. Like you mentioned, I will say that most likely it will be again in Europe. That's my opinion. But And I can say this, and I will say, the Chile regulation for transmission do not work, Do not work that system like it's they designed it, it's not going to work. They came up with this 15 minute storage.

Speaker 2

That's not going to be good. They're not going to get it's not going to work. So I think unlikely, I don't know if it will bid or not. We'll probably it will bid, but I think that's going to be a successful project. We continue to see the transmission regulators in Europe much more clearly understanding how this works and how they how to make the work.

Speaker 2

The U. S. Were just starting. So

Speaker 7

and I send this guy to the regulator.

Speaker 2

I'm sure they don't listen to this call, but It will be good for them to go back, look at it, because they we have we told them, this is not going to work, but I think they have a different view of what they want

Operator

Our next question comes from Julien Dumoulin Smith with Bank of America.

Speaker 2

Hey Julien. Hey, good morning guys.

Speaker 8

Hey, Julian, pleasure namesake. Thank you very much for the time. Appreciate it.

Speaker 2

That's right.

Speaker 8

So listen, I just wanted to first come back to the $500,000,000 revenue commentary that Manu provided. Can you elaborate a little bit on what this says about Getting to kind of the target gross margins, especially as you think about what that says for next year here. Obviously, you have that improvement through the course of

Speaker 5

this year. What does that

Speaker 8

say on the incremental margin that you're getting for next year now that you're really accelerating the revenue side of this?

Speaker 3

Yes. So thanks for your question, Julian. So just a way to think about our gross margin and you can see that come through our Guidance updates, right? We are signing the new contracts in the 10% to 15% margin rates. And more importantly, the new contracts We're signing, we're keeping those margin rates.

Speaker 3

And as you look at the increase in the guidance from the last call, the current call, you can see the increase From a gross margin perspective or a gross margin rate perspective of 50 basis points and the new contracts being signed at As you roll forward into 2024, that's a good assumption from a gross margin perspective. And as you translate the gross margin into EBITDA, it gets even better and increases our confidence from EBITDA positive outlook for 2024 It's because we are getting operating leverage and we are very disciplined about our overhead expense and our model of Spending overhead at less than 50% of our top line growth. So if you model out 23 going to 24, Top line growing at 35% to 40% over a higher revenue base in 2023, our gross margin Contracts being signing in the 10% to 15% rate. Remember, one of the advantages of Better execution in 'twenty three is we are able to pull forward our legacy backlog earlier in our lifecycle and therefore there's very little legacy backlog to be executed in the fiscal year 'twenty four. So the gross margins on the new contracts are coming through and then that translates into a very healthy EBITDA.

Speaker 8

Excellent. All right, great. And then just going back to the commentary in the call on Naspersa, right, you talked about this new strategy this month about Including it as standard in your hardware offerings, what does that say visavis

Speaker 5

the Fluence IQ outlook

Speaker 8

And the revenue contribution and its level of meaningfulness, right, I think earlier you guys had said it wasn't really that meaningful until 2025. Now that you're including it as sort of standard, does that change that expectation?

Speaker 2

No, Julie, this was always part of the plan. Remember, we had one When we looked at the business, one of the changes we did was integrating the sales channel and our view on when this business will be material and when we will get 2

Speaker 4

has not

Speaker 2

changed. So this was part of what we wanted to do when we announced our plan, Our new plan in December of last year, this was a part of it is going as planned as we expect that we remember that we talked about Single channel and then replatforming our Mosaic business and replatform is going very well And the single channel, which is essentially for Naspersa, which will give us a base for both upsells and cross sells, we were able to Pull it out, so we are starting as we already have been done is we're already offering to our customers as part of our standard offer.

Speaker 8

Excellent. Okay, perfect. We'll leave it there.

Speaker 3

Thank you guys very much. Speak soon.

Speaker 4

Thank you, Julian.

Operator

Our next question comes from Ben Kallo with Baird.

Speaker 2

Hey, good morning, Ben.

Speaker 9

Hey, guys. Good results and good progress. Thank you I just wanted to follow-up just on margin. I'm sorry to keep going on this question, but I just wanted to think about the different levers and cost improvements versus legacy contracts. I think Julian asked something similar to this.

Speaker 9

But as we go into the attachment rates of other services software, As we go into 2024 and beyond and how you guys think about that. And then just my follow-up is kind of housekeeping, but just the IRA benefits And profitability, I'm sorry, Emmanuel, if you said this, but have you baked any of that into your profitability change Going forward, so the production tax credits or anything like that? Thank you.

Speaker 3

Yes, sure. So Ben, if I can there are lots to unpack there. So let me take it as how I understood the question. So if you bridge gross margins from our legacy contracts to some of the new deals we are signing in the 10% to 15% margin range, right? And we put a bridge in the back of the deck as well.

Speaker 3

But the drivers Of our margins between the legacy contracts and the newer contracts we're signing is better execution, better pricing, And then I would say better risk management. So those are the big drivers. We had also increased our margin Expectations to be 10% to 15% from a much lower single digit expectations we've had in the past. And as a result, When we are executing our legacy contract, we are usually executing them at very low single digit margins, almost close to breakeven. And as compared to the newer projects that we are executing in the 10% to 15% margin rates Depending on size and complexity in the region, you can see that trend come through in the gross margin guidance.

Speaker 3

If you take our 1st half actuals gross margin rate and compare that to the guidance for the full year and calculated implied second half, You can get to high single digits gross margin rate for the second half of the year. And that's important is because it gives you a good read to be close to adjusted EBITDA breakeven in the Q4. So that's kind of contextualizing the margins Of the legacy business compared to what we are signing from a new contract perspective. In terms of the IRA PTC benefit that you specifically asked, what we've said is, look, It will be a contributor to more volume potentially as opposed to taking us outside of the 10% to 15% margin Range maybe in the rounds it takes us to the for those contracts That have the Fluence make to the top end of the range versus the bottom end of the range, but we're still within the 10% to 15% margin rate. As we go through the years to kind of round out your question, we are seeing high attach rates for services On the assets we have deployed, we're seeing 97% attach rates.

Speaker 3

That's slightly better than what we had last quarter or kind of in line with what we had last quarter. That in terms of a meaningful contributor to our margin rates and margin dollars We'll be better in 'twenty four, more meaningful in 'twenty five and then kind of gets to a higher number in 'twenty six. Those contracts are at a higher margin rate than our average solutions margin. So it is the power of the installed base. It also gives us a great option

Operator

That concludes today's question and answer session. I'd like to turn the call back to Julian DeBrito for closing remarks.

Speaker 2

Great. Well, first, I want to thank everybody for participating and joining us and your questions. And what We are really, really proud of the work of the team here and the success. This is clearly working better than what We were expecting, so that's great news. And this only will, I think, in a way reaffirms our commitment to Continue working hard and because it really, really makes a difference at the end of the day.

Speaker 2

So really happy. And thank you again for participating and we'll Talk to all of you during the quarter and hopefully see you soon. Bye bye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
BARK Q2 2023
00:00 / 00:00
Remove Ads